# Solved: ECON 201 Principles of Macroeconomics Chapter 21-unemployment

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Ch21 Unemployment
Multiple Choice Questions
1. The unemployment rate measures:
A. the number of people unemployed divided by the number of people employed.
B. unemployed workers as a percentage of the labor force.
C. unemployed workers as a percentage of the population age over-sixteen.
D. unemployed workers as a percentage of the population.
Explanation:
Type: Multiple Choice
2. During the Great Depression of the 1930s, the unemployment rate reached more than _________ of the labor force.
A. 25%
B. 45%
C. 65%
D. 85%
Explanation:
Type: Multiple Choice
3. Reginald looked for work for six months but could not find a job to his liking. He now spends his time at the beach. For purposes of employment he is considered:
A. out of the labor force.
B. unemployed.
C. employed in the underground economy.
D. underemployed.
Explanation:
Type: Multiple Choice
4. The U.S. unemployment rate moves up and down as the economy moves in and out of recessions. But over time, the unemployment rate seems to return to a range of ____________.
A. 2%-4%
B. 4%-6%
C. 6%-8%
D. 8%-10%
Explanation:
Type: Multiple Choice
5. If the unemployment rate is 8 percent, then this means:
A. 8 percent of the population is unemployed.
B. 8 percent of the population age over sixteen is unemployed.
C. 8 percent of the labor force is unemployed.
D. the number of unemployed persons equals 8 percent of the employed persons.
Explanation:
Type: Multiple Choice
6. If the number of employed persons in a country equals 24 million, the number of unemployed persons equals 8 million, and the number of persons over age 16 in the population equals 40 million, the unemployment rate equals:
A. 32%.
B. 25%.
C. 20%.
D. 8%.
Explanation:
Type: Multiple Choice
7. During the deep recessions of the early 1980s and of 2007-2009, unemployment reached roughly __________.
A. 10%
B. 20%
C. 30%
D. 40%
Explanation:
Type: Multiple Choice
8. A welder who quits his job and moves from Pittsburgh to Madison to try to get a better welding job is said to be:
A. frictionally unemployed.
B. underemployed.
C. cyclically unemployed.
D. structurally unemployed.
Explanation:
Type: Multiple Choice

9. Frictional unemployment is:
A. unemployment that is due to the friction of competing ideological systems.
B. unemployment caused by lack of training and education.
C. unemployment caused by automation in the workplace.
D. unemployment that is due to normal turnover in the labor market.
Explanation:
Type: Multiple Choice
10. If a nation’s labor force receives a significant influx of young workers:
A. the natural rate of unemployment is likely to increase.
B. the natural rate of unemployment is likely to decrease.
C. the natural rate of unemployment is unlikely to change
D. frictional unemployment will likely decrease to zero.
Explanation:
Type: Multiple Choice
11. The type of unemployment that occurs because of a recession is called:
A. cyclical unemployment.
B. the natural rate of unemployment.
C. seasonal unemployment.
D. frictional unemployment.
Explanation:
Type: Multiple Choice
12. The definition of market equilibrium states that at the _______________, the quantity of labor demanded by employers will equal the quantity supplied.
A. efficiency wage
B. equilibrium wage
C. sticky wage
D. natural rate of unemployment
Explanation:
Type: Multiple Choice
13. The rise in unemployment that occurs because of a recession is known as cyclical unemployment, because it is closely tied to the ______________.
A. natural rate of unemployment
C. supply curve
D. labor supply
Explanation:
Type: Multiple Choice
14. The most significant real economic cost of high unemployment is:
A. the potential goods and services that might have been produced but weren’t.
B. the money cost of retraining persons to obtain new jobs.
C. the lost tax revenue that might have been paid by persons if they had worked.
D. the money cost of unemployment insurance payments to the unemployed.
Explanation:
Type: Multiple Choice
15. Women composed __________ of the paid workforce in 1900 and 50% of the paid workforce in 2010.
A. 2%
B. 18%
C. 33%
D. 60%
Explanation:
Type: Multiple Choice
16. Karen chooses to go to university fulltime rather than to work. Karen:
A. is not part of the labor force.
B. is part of the labor force and what economists call a discouraged worker.
C. is part of the labor force, but not actively seeking work.
D. is considered employed.
Explanation:
Type: Multiple Choice
17. In November 2010 the labor force in Siouxtown, was 14,800. There were 14,483 persons employed. The local unemployment rate:
A. was 1.2%.
B. was 2.1%.
C. was 5.6%.
D. was 7.1%.
Explanation:
Type: Multiple Choice
18. The unemployment rate in a town in which 65,400 persons are employed and 11,000 are unemployed equals:
A. 20.2 %.
B. 16.8%.
C. 14.4%.
D. 11%.
Explanation:
Type: Multiple Choice
19. ______________________ argues that the productivity of workers will increase if they are paid more, and so employers will often find it worthwhile to pay their employees somewhat more than market conditions might dictate.
A. Efficiency wage theory
B. Equilibrium wage theory
C. Employee wage theory
D. Employer wage theory
Explanation:
Type: Multiple Choice
20. Freelife, New Hampshire has a labor force of 78,567 persons and employment of 74,382. The unemployment rate for the city is:
A. 5.3%.
B. 5.6%.
C. 6.0%.
D. 7.1%
Explanation:
Type: Multiple Choice
21. If the unemployment rate is 6 percent and the number of persons unemployed is 6 million, then the number of people employed is equal to:
A. 100 million.
B. 94 million.
C. 106 million.
D. 6 million.
Explanation:
Type: Multiple Choice
22. Gomer loses his job as a road construction worker and cannot find another position with equivalent pay and benefits. As a result, he is still checking the want ads and reporting to the unemployment office on a weekly basis. He is considered to be:
A. laid off.
B. underemployed.
C. out of the labor force.
D. unemployed.
Explanation:
Type: Multiple Choice
23. Which of the following statements is incorrect?
A. Employment insurance compensation encourages longer job searches, which may lead to a better match between jobs and employees.
B. Employment insurance compensation increases the opportunity cost of being unemployed.
C. The typical employment insurance compensation is roughly one third of one’s latest salary for up to 26 weeks.
D. Demand and supply curves for labor are constantly shifting.
Explanation:
Type: Multiple Choice
24. Through good economic years and bad, many European economies had unemployment rates hovering near _________ since the 1970s.
A. 1%
B. 5%
C. 10%
D. 20%
Explanation:
Type: Multiple Choice
25. Craigburg has a working age population of 20 million. Of those, 11 million are employed and 1 million are unemployed. The unemployment rate is ________ and the participation rate is __________.
A. 5%; 55%.
B. 8.3%; 60%.
C. 8.3%; 55%.
D. 5%; 60%.
Explanation:
Type: Multiple Choice
26. Cyclical unemployment arises when:
A. the agriculture sector completes the cycle of planting, cultivating, and harvesting the nation’s food supply.
B. labor unions strike for higher wages.
C. the business cycle enters an expansionary phase.
D. business activity in the macroeconomy declines.
Explanation:
Type: Multiple Choice
27. Frictional unemployment occurs when:
A. there is friction between an employer and employee.
B. a worker decides to quit one job to seek a different job.
C. a large corporation transfers a worker to another city.
D. college students go back to school at the end of the summer.
Explanation:
Type: Multiple Choice
28. A forestry worker who is out of work because of the temporarily low demand for wood products associated with a recession is defined as:
A. cyclically unemployed.
B. underemployed.
C. frictionally unemployed.
D. naturally unemployed.
Explanation:
Type: Multiple Choice
29. The _________________ argument points out that if an employer reacts to poor business conditions by reducing pay for all workers, then the best workers, with the best employment alternatives at other firms, are the most likely to leave and the least-attractive workers, with fewer employment alternatives, are more likely to stay.
A. efficiency wage theory
B. adverse selection of wage cuts
C. equilibrium wage theory
D. employer wage theory
Explanation:
Type: Multiple Choice
30. The development of a nationwide computerized job bank listing of all job openings would be most likely to reduce:
A. natural unemployment.
B. frictional unemployment.
C. seasonal unemployment.
D. cyclical unemployment.
Explanation:
Type: Multiple Choice
31. Each month the Census Bureau carries out the Current Population Survey (CPS) (which has been carried out every month since 1940). A total of __________ households are contacted every month.
A.  600
B. 6000
C. 60,000
D. 600,000
Explanation:
Type: Multiple Choice
32. The unemployment rate may overestimate the true extent of unemployment if:
A. many part-time employees would like to work fulltime, but are unable to get the additional work.
B. many people who claim to be unemployed actually work in the underground economy.
C. people falsely claim that they are actively seeking work in order to receive unemployment benefits.
D. either B) or C) occurs.
Explanation:
Type: Multiple Choice
33. Insofar as government public policy is concerned, the best way to battle unemployment would be __________________.
A. to minimize recessions
B. to maximize unemployment payments
C. to maximize unemployment insurance duration
D. to minimize labor unions
Explanation:
Type: Multiple Choice
34. The labor force consists of:
A. discouraged workers, employed workers, plus those actively seeking work.
B. all adults who are working or actively seeking work.
C. all adults who are able to work.
D. all adults who are working, plus those not working.
Explanation:
Type: Multiple Choice
35. The unemployment rate may underestimate the true extent of unemployment if:
A. many part-time employees would like to work fulltime, but are unable to get the additional work.
B. employees increase the number of hours they work overtime.
C. there are a large number of people working in the underground economy.
D. people are pretending to look for work so that they can continue receiving unemployment benefits.
Explanation:
Type: Multiple Choice
36. The unemployment rate may underestimate the true extent of unemployment if:
A. many people have a part time as well as a full time job.
B. there are a large number of people working in the underground economy.
C. many people become discouraged and cease looking for work.
D. employees increase the number of hours they work overtime.
Explanation:
Type: Multiple Choice
37. A university student who is enrolled in school fulltime and not seeking employment is considered:
A. out of the labor force.
B. unemployable, and not counted in official statistics.
C. employed in leisure.
D. underemployed.
Explanation:
Type: Multiple Choice
38. Suppose that everyone who has looked for a job for more than six months gave up in despair and stopped looking. What would happen to the unemployment rate?
A. It would increase.
B. It would fall.
C. It would not change.
D. It would change, but the effect cannot be predicted.
Explanation:
Type: Multiple Choice
39. The extent of _______________________ will depend on how easy it is for workers to learn about alternative jobs, which may reflect the ease of communications about job prospects in the economy.
A. frictional unemployment
B. cyclical unemployment
C. seasonal unemployment
D. cyclical employment
Explanation:
Type: Multiple Choice
Essay Questions
1. What is the insider-outsider model of the labor force and why might it be important for employers to understand?
Reference:
Explanation: The insider-outsider model of the labor force argues that those already working for firms are “insiders,” while new employees, at least for a time, are “outsiders.” A firm depends on its insiders to grease the wheels of the organization, to be familiar with routine procedures, to train new employees, and so on. However, cutting wages will alienate the insiders and damage the firm’s productivity and prospects.
2. Within the context of employment practices, define “implicit contracts” and explain its real significance to both employer and employee.
Reference:
Explanation: Implicit contract:  the employer will try to keep wages from falling when the economy is weak or the business is having trouble, and the employee will not expect huge salary increases when the economy or the business is strong. This wage-setting behavior acts like a form of insurance: the employee has some protection against wage declines in bad times, but pays for that protection with lower wages in good times. Clearly, this sort of implicit contract means that firms will be hesitant to cut wages, lest workers feel betrayed and work less hard or even leave the firm.
3. What exactly is the “natural rate of unemployment”?
Reference:
Explanation: It is only the “natural” rate because it is the unemployment rate that would result from the combination of economic, social and political factors that exist at a time—not including recession. These forces include the usual pattern of companies expanding and contracting their workforces in a dynamic economy, social and economic forces that affect the labor market, or public policies that affect either the eagerness of people to work or the willingness of businesses to hire.
4. Define the “adverse selection of wage cuts argument” and discuss the practical consequences for business owners.
Reference:
Explanation: The adverse selection of wage cuts argument points out that if an employer reacts to poor business conditions by reducing wages for all workers, then best workers, with the best employment alternatives at other firms, are the most likely to leave and the least-attractive workers, with fewer employment alternatives, are more likely to stay. Consequently, firms are more likely to choose which workers should depart, through layoffs and firings, rather than trimming wages across the board.
5. Frictional unemployment and the natural rate of unemployment also seem to depend on the age distribution of the population. Describe why this is so.
Reference:
Explanation: Unemployment rates are typically lower for people between about 25–54 years of age than they are for those who are either younger or older. “Prime-age workers,” as those in the 25–54 age bracket are sometimes called, are typically at a place in their lives when they want very much to have a job and income arriving at all times. But some proportion of those who are under 30 may still be trying out jobs and life options and some proportion of those over 55 are eying retirement. In both cases, the relatively young or old tend to worry less about unemployment than those in-between, and their periods of frictional unemployment may be longer as a result. Thus, a society with a relatively high proportion of relatively young or old workers will tend to have a higher unemployment rate than a society with a higher proportion of its workers in middle age.
6. One set of reasons why wages may be “sticky downward,” as economists put it, involves economic laws and institutions. Describe these two “cut-and-dried” labor market realities.
Reference:
Explanation: For low-skilled workers being paid the minimum wage, it is illegal to reduce their wages. For union workers operating under a multiyear contract with a company, wage cuts might violate the contract and create a labor dispute or a strike.
7. The conditions underlying supply and demand for labor have been different in Europe from that in the USA, in a way that has created a much higher natural rate of unemployment. Discuss various factors which contribute to this
Reference:
Explanation: Many European countries have a combination of generous welfare and unemployment benefits, together with nests of rules that impose additional costs on businesses when they hire. In addition, many European countries have laws that require firms to give workers months of notice before laying them off and to provide substantial severance or retraining packages after laying them off. The legally required notice before laying off a worker can be more than three months in Spain, Germany, Denmark, and Belgium, and the legally required severance package can be as high as a year’s salary or more in Austria, Spain, Portugal, Italy, and Greece. Such laws will surely discourage laying off or firing current workers. But when companies know that it will be difficult to fire or lay off workers, they also become hesitant about hiring in the first place.
The typically higher levels of unemployment in many European countries in recent years, which have prevailed even when Europe’s economies are growing at a solid pace, are attributable to the fact that the sorts of laws and regulations that lead to a high natural rate of unemployment are much more prevalent in Europe than in the United States.
8. Cyclical unemployment is a short-term problem. What is its root cause? What is the preferred solution and how can this be accomplished?
Reference:
Explanation: Cyclical unemployment is a short-term problem, caused because the economy is in a recession. Thus, the preferred solution will be to avoid or minimize recessions. This can be accomplished by stimulating the overall buying power in the economy, so that firms perceive that sales and profits are possible, which makes them eager to hire.
9. For a number of reasons, economists believe that the natural rate of unemployment in the U.S. economy declined from the 1980s to the 1990s and early 2000s. Provide at least two different reasons for this phenomenon and discuss each.
Reference:
Explanation: 1. The Internet has provided a remarkable new tool through which job-seekers can find out about jobs at different companies and can make contact with resumes and cover letters with relative ease. An Internet search is far easier than trying to find a list of local employers and then hunting up phone numbers for all of their human resources departments, requesting a list of jobs and application forms, and so on.
2. The growth of the temporary worker industry has probably helped to reduce the natural rate of unemployment. In the early 1980s, only about 0.5% of all workers held jobs through temp agencies; by the early 2000s, the figure had risen above 2%. Temp agencies can provide jobs for workers while they are looking for permanent work. They can also serve as a clearinghouse, helping workers find out about jobs with certain employers and getting a tryout with the employer. For many workers, a temp job is a stepping-stone to a permanent job that they might not have heard about or gotten any other way, so the growth of temp jobs will tend to reduce frictional unemployment, too.
3. The aging of the “baby boom generation”—that especially large generation of Americans born between 1946 and 1963—meant that the proportion of young workers in the economy was relatively high in the 1970s, as the boomers entered the labor market, but is relatively low today. As noted earlier, middle-aged workers are far more likely to keep steady jobs than younger workers, a factor which tends to reduce the natural rate of unemployment.
10. Briefly explain the mechanics of how the US unemployment benefits work.
Reference:
Explanation: Unemployment insurance is a joint federal–state program, established by federal law in 1935. The federal government sets minimum standards for the program, but most of the administration is done by state governments.
The funding for the program is a federal tax collected from employers. The federal government requires that the tax be collected on the first \$7,000 in wages paid to each worker; however, states can choose to collect the tax on a higher amount if they wish, and 41 states have set a higher limit. States can choose the length of time that benefits will be paid, although most states limit unemployment benefits to 26 weeks—with extensions possible in times of especially high unemployment. The fund is then used to pay benefits to those who become unemployed. Average unemployment benefits are equal to about one-third of the wage earned by the person in their previous job, but the level of unemployment benefits varies considerably across states.