Chapter 16
Business Cycles and Unemployment
1. A business cycle is the
a. period of time in which expansion and contraction of economic activity are equal.
b. period of time in which there are three phases which are peak, depression, and
expansion.
c. recurring growth and decline in real GDP.
d. period of time in which a business is established and ceases operations.
ANS
a. Incorrect. A business cycle is the recurring growth and decline in real GDP.
b. Incorrect. There are four phases - the trough is missing in this answer.
c. Correct. A business cycle is the recurring growth and decline in real GDP.
d. Incorrect. This answer is a microeconomics concept - the business cycle is a macro
concept.
2. A business cycle is the period of time in which
a. a business is established and ceases operations.
b. there are four phases which are peak, recession, trough and expansion.
c. the price level changes.
d. expansion and contraction of economic activity are equal.
ANS
a. Incorrect. This answer is a microeconomics concept - the business cycle is a macro
concept.
b. Correct. A business cycle is the period of time in which there are four phases which are
peak, recession, trough and recovery. See Exhibit 1 in the text.
c. Incorrect. This business cycle is measured by changes in real GDP.
d. Incorrect. Economic activity is unequal during a business cycle.
3. The
a. expansion
b. recession
c. peak
d. trough
phase of the business cycle follows a recession.
ANS
a. Incorrect. The trough phase of the business cycle follows a recession.
b. Incorrect. The trough phase of the business cycle follows a recession.
c. Incorrect. The trough phase of the business cycle follows a recession.
d. Correct. The trough phase of the business cycle follows a recession.
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Exhibit 11 Business cycle
4. In Exhibit 11, the expansion phase of the business cycle is represented by points
a. A and C.
b. B and F.
c. B and D.
d. C and G.
ANS
a. Incorrect. A is a trough point and C is a peak point.
b. Correct. The recovery phase of the business cycle can be represented by points B and
F.
c. Incorrect. B is a recovery point, but D is a recession point.
d. Incorrect. C is a peak and D is a recession point.
5. A general rule is that economy is experiencing a recession when
a. real GDP declines for at least three months.
b. real GDP declines for at least nine months.
c. nominal GDP declines for at least nine months.
d. real GDP declines for at least six months.
ANS
a. Incorrect. A general rule is that economy is experiencing a recession when real GDP
declines for at least six months.
b. Incorrect. A general rule is that economy is experiencing a recession when real GDP
declines for at least six months.
c. Incorrect. A general rule is that economy is experiencing a recession when real GDP
declines for at least six months.
d. Correct. A general rule is that economy is experiencing a recession when real GDP
declines for at least six months.
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6. A person who has given up searching for work is called
a. frictionally unemployed.
b. structurally unemployed.
c. a discouraged worker.
d. unemployed.
ANS
a. Incorrect. This is short-term unemployment for workers who are changing jobs.
b. Incorrect. This is long-term unemployment caused by a mismatch of worker skills and
skills required for a job.
c. Correct. A person who has given up searching for work is called a discouraged worker.
d. Incorrect. The unemployed are workers seeking jobs regardless of the type of
unemployment.
7. John Steinbeck's Cannery Row describes a character who takes his own life because of
poor job prospects. If he was an unemployed person who gave up looking for work, he
would be considered
a. chronically unemployed.
b. a discouraged worker.
c. a member of the labor force.
d. frictionally unemployed.
ANS
a. Incorrect. This is a person who is frequently unemployed.
b. Correct. This is an unemployed person who has given up looking for work.
c. Incorrect. This is a person age 16 and over who is not a member of the “not in labor
force” category.
d. Incorrect. This is a worker who is between jobs.
8. Unemployment that is of a short duration to allow a person time to find a new job is
a. structural unemployment.
b. cyclical unemployment.
c. frictional unemployment.
d. durational unemployment.
ANS
a. Incorrect. This is long-term unemployment caused by a mismatch of worker skills and
skills required for a job.
b. Incorrect. This is unemployment caused by the business cycle.
c. Correct. Unemployment that is of a short duration to allow time to find a new job is
frictional unemployment.
d. Incorrect. This is a meaningless term.
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9. A person who voluntarily quits their job in New York and expects to get a similar job
in Los Angeles is an example of
a. structural unemployment.
b. cyclical unemployment.
c. durational unemployment.
d. frictional unemployment.
ANS
a. Incorrect. This is long-term unemployment caused by a mismatch of worker skills
required for a job.
b. Incorrect. This is unemployment caused by the business cycles.
c. Incorrect. This is a meaningless.
d. Correct. This is short-term unemployment before the worker finds an existing job.
10. Frictional unemployment refers to
a. people who are out of work and have no job skills.
b. short periods of unemployment needed to match jobs and job seekers.
c. people who spend relatively long periods out of work.
d. unemployment related to the ups and downs of the business cycle.
ANS
a. Incorrect. This is structural unemployment.
b. Correct. Frictional unemployment refers to short periods of unemployment needed to
match jobs and job seekers.
c. Incorrect. This answer does not give the reason for unemployment.
d. Incorrect. This is cyclical unemployment.
11. Sam is a musician who is out of work because electronic equipment replaced live
musicians. This is an example of
a. frictional unemployment.
b. cyclical unemployment.
c. structural unemployment.
d. involuntary unemployment.
ANS
a. Incorrect. This would result from simply changing jobs.
b. Incorrect. This would be the result of the business cycle.
c. Correct. This is an example of technological change requiring a worker to retrain for
another job.
d. Incorrect. This is not one of the types of unemployment given in the text.
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12. Louise is unemployed due to a decrease in the demand for workers with knowledge of
a certain word processing language. This is an example of
a. cyclical unemployment.
b. frictional unemployment.
c. involuntary unemployment.
d. structural unemployment.
ANS
a. Incorrect. This would result from the business cycle.
b. Incorrect. This would result from simply changing jobs.
c. Incorrect. This is not one of the types of unemployment given in this text.
d. Correct. Change in demand requires a worker to retrain for another job.
13. Consider a broom factory that permanently closes because of foreign competition. If
the broom factory's workers cannot find new jobs because their skills are no longer
marketable, they are classified as
a. seasonally unemployed.
b. frictionally unemployed.
c. structurally unemployed.
d. cyclically unemployed.
ANS
a. Incorrect. This is unemployment for seasonal reasons.
b. Incorrect. This is unemployment from simply changing jobs.
c. Correct. This is a loss of jobs that requires retraining for another job.
d. Incorrect. This is unemployment caused by the business cycle.
14. The increase in unemployment associated with a recession is called
a. structural unemployment.
b. frictional unemployment.
c. discouraged unemployment.
d. cyclical unemployment.
ANS
a. Incorrect. This is long-term unemployment caused by a mismatch of worker skills and
skills required for a job.
b. Incorrect. This is unemployment for simply changing jobs.
c. Incorrect. This is unemployment caused by the business cycle.
d. Correct. The increase in unemployment associated with a recession is called
cyclical unemployment.
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15. Which of the following is true?
a. The GDP gap is the difference between full-employment real GDP and actual real
GDP.
b. We desire economic growth because it increases the nation's standard of living.
c. Economic growth is measured by the annual percentage increase in a nation's real
GDP.
d. Discouraged workers are a reason critics say the unemployment rate is understated.
e. All of theabove answers are correct.
ANS
a. Incorrect. All answers are correct.
b. Incorrect. All answers are correct.
c. Incorrect. All answers are correct.
d. Incorrect. All answers are correct.
e. Correct. All answers are correct.
16. What stage of the business cycle immediately follows the trough?
a.peak
b. recovery
c. recession
d. depression
ANS
a. Incorrect. The stage of the business cycle immediately following the trough is the
recovery or expansion. See Exhibit 1 in the text.
b. Correct. The stage of the business cycle immediately following the trough is the
recovery or expansion. See Exhibit 1 in the text.
c. Incorrect. The stage of the business cycle immediately following the trough is the
recovery or expansion. See Exhibit 1 in the text.
d. Incorrect. The stage of the business cycle immediately following the trough is the
recovery or expansion. See Exhibit 1 in the text.
17. The government's chief forecasting gauge for business cycles is the
a. unemployment rate.
b. real GDP.
c. personal income index.
d. index of leading indicators.
ANS
a. Incorrect. The government's chief forecasting gauge for business cycles is the index of
leading indicators.
b. Incorrect. The government's chief forecasting gauge for business cycles is the index of
leading indicators.
c. Incorrect. This is a meaningless term.
d. Correct. The government's chief forecasting gauge for business cycles is the index of
leading indicators.
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18. Which of the following is not a lagging indicator?
a. duration of unemployment
b. stock prices
c. commercial and industrial loans
d. prime rate
ANS
a. Incorrect. This is a lagging indicator. See Exhibit 5 in the text.
b. Correct. This is a leading indicator. See Exhibit 5 in the text.
c. Incorrect. This is a lagging indicator. See Exhibit 5 in the text.
d. Incorrect. This is a lagging indicator. See Exhibit 5 in the text.
19. Suppose the official unemployment rate is 10 percent. We can conclude without
question that
a. the same 10 percent of the people in the economy were out of work for the entire year.
b. 1 out of every 10 people in the civilian labor force is currently unemployed.
c. the same 10 percent of the people in the civilian labor force was out of work for the
entire year.
d. each person in the civilian labor force was out of work for 10 percent of the year.
ANS
a. Incorrect. The official unemployment rate is number of unemployed as a percentage of
the civilian labor force.
b. Correct. The official unemployment rate is number of unemployed as a percentage of
the civilian labor force.
c. Incorrect. The official unemployment rate is number of unemployed as a percentage of
the civilian labor force.
d. Incorrect. The official unemployment rate is number of unemployed as a percentage of
the civilian labor force.
20. Sally lost her job when her company went out of business because of a recession.
This is an example of
a. frictional unemployment.
b. structural unemployment.
c. cyclical unemployment.
d. technological unemployment.
ANS
a. Incorrect. Frictional unemployment is short-term unemployment for workers who are
changing jobs.
b. Incorrect. Structural unemployment is long-term unemployment caused by a mismatch
of workers skills and skills required for a job.
c. Correct. Cyclical unemployment is caused by job loss during a recession.
d. Incorrect. Changes in technology are a reason for structural unemployment.
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