Chapter 14
Unemployment: A Recurring Problem
True/False Questions
1. For the individual, the output lost during periods of unemployment is the greatest economic cost
of unemployment.
ANSWER: F
2. The unemployment rate is the percentage of the civilian labor force that is unemployed.
ANSWER: T
3. Individuals are considered unemployed if they do not have a job.
ANSWER: F
4. In recent years, the unemployment rate of blacks and whites has been about the same.
ANSWER: F
5. Beth recently received a degree in management. Because of a downturn in the economy,
however, she has been unable to find a job. She is said to be cyclically unemployed.
ANSWER: T
6. An automobile production line worker who is laid off as a result of robotics being employed in
the factory is an example of a structurally unemployed worker.
ANSWER: T
7. With both structural and frictional unemployment, there are not enough jobs for prospective
workers.
ANSWER: F
8. Structural unemployment helps the economy to operate more efficiently.
ANSWER: F
9. The full employment rate of unemployment will change over time as the composition of the
labor force and other factors change.
ANSWER: T
10. Most economists believe that changes in the unemployment rate over the business cycle are
caused by changes in aggregate demand.
ANSWER: T
11. If input prices are not "sticky," changes in aggregate supply will quickly eliminate any
unemployment caused by a change in aggregate demand.
ANSWER: T
12. An increase in government spending or taxes will result in an increase in aggregate demand.
ANSWER: F
13. Monetary policy refers to the Federal Reserve's attempts to alter the money supply.
ANSWER: T
446
Test Bank  447
14. Stabilization policies are government policies intended to maintain full employment and a
reasonable stable price level.
ANSWER: T
15. Job training programs are probably necessary to reduce structural unemployment.
ANSWER: T
16. During a downturn in the business cycle, decreases in government spending will reduce cyclical
unemployment.
ANSWER: F
17. Teenagers are among those most adversely affected by the minimum wage.
ANSWER: T
18. Most economists think that the minimum wage improves the situation of the working poor
because those who retain their jobs will have higher incomes.
ANSWER: F
19. The unemployment problem is more severe in the United States than in most European countries.
ANSWER: F
20. Most economists think that expansionary fiscal and monetary policies would have little effect on
unemployment rates in most European countries.
ANSWER: T
21. Higher wages due to the minimum wage and the bargaining power of labor unions have
contributed to the unemployment problem in most European countries.
ANSWER: T
Multiple-Choice Questions
1. For society, the greatest cost of unemployment is:
a. lost output.
b. increased crime rates.
c. increased drug use.
d. family break-ups.
ANSWER: a
2. For the individual, the most obvious cost of unemployment is:
a. lost output.
b. lost income.
c. increased drug use.
d. family break-ups.
ANSWER: b
3. The unemployment rate is defined as:
a. the number of people not working.
b. the number of people in the civilian labor force not working.
c. the percent of people not working.
d. the percent of people in the civilian labor force not working.
ANSWER: d
448  Chapter 14/Unemployment: A Recurring Problem
4. The number of persons employed plus the number of persons unemployed is:
a. the unemployment rate.
b. the labor force participation rate.
c. the civilian labor force.
d. the nonparticipants in the civilian labor force.
ANSWER: c
5. In order to be considered unemployed, an individual must:
a. not be working.
b. not be working and be available to work.
c. not be working, be available to work, and actively sought employment during the past four
weeks.
d. actively sought employment during the past four weeks.
ANSWER: c
6. The three types of unemployment are:
a. frictional, structural, and cyclical.
b. frictional, technical, and cyclical.
c. frictional, structural, and recessionary.
d. frictional, compositional, and cyclical.
ANSWER: a
7. Which of the following best describes frictional unemployment?
a. It is a long-term period of unemployment.
b. It is a temporary period of unemployment.
c. It is caused by a lack of jobs.
d. Workers suffering from this type of unemployment may need retraining.
ANSWER: b
8. Which of the following best describes structural unemployment?
a. It is occurs during the expansionary phase of the business cycle.
b. It is a temporary period of unemployment.
c. It is caused by a lack of jobs.
d. Workers suffering from this type of unemployment may need retraining.
ANSWER: d
9. Which of the following best describes cyclical unemployment?
a. It is occurs during the expansionary phase of the business cycle.
b. It is greatest at the peak of the business cycle.
c. It is caused by a lack of jobs.
d. Workers suffering from this type of unemployment may need retraining.
ANSWER: c
10. Unemployment caused by a mismatch between the skills of prospective workers and the
requirements of available jobs is known as:
a. technological unemployment.
b. cyclical unemployment.
c. frictional unemployment.
d. structural unemployment.
ANSWER: d
Test Bank  449
11. Unemployment that occurs during the contractionary phase of the business cycle is known as:
a. frictional unemployment.
b. structural unemployment.
c. cyclical unemployment.
d. contractionary unemployment.
ANSWER: c
12. Temporary unemployment arising from the job search process is known as:
a. frictional unemployment.
b. structural unemployment.
c. cyclical unemployment.
d. contractionary unemployment.
ANSWER: a
13. Full employment occurs when:
a. all the labor resources in the economy are employed.
b. the only types of unemployment are frictional and structural.
c. the only type of unemployment is frictional.
d. the only types of unemployment are structural and cyclical.
ANSWER: b
14. The natural rate of unemployment:
a. changes slowly over time.
b. is constant.
c. varies from month to month.
d. occurs when there is only cyclical unemployment.
ANSWER: a
15. The natural rate of unemployment is currently about:
a. 6.5 percent.
b. 6 percent.
c. 5.5 percent.
d. 5 percent.
ANSWER: d
16. Changes in the unemployment rate over the business cycle are most likely caused by:
a. changes in aggregate demand.
b. changes in aggregate supply.
c. changes in technology.
d. changes in government regulation.
ANSWER: a
17. Suppose there is unemployment because of inadequate aggregate demand. If wage rates are
"sticky:"
a. increases in aggregate supply will cause the economy to return to full employment.
b. decreases in aggregate supply will cause the economy to return to full employment
c. increases in aggregate demand will cause the economy to return to full employment.
d. cyclical unemployment may persist for a long time.
ANSWER: d
450  Chapter 14/Unemployment: A Recurring Problem
18. An increase in cyclical unemployment would most likely be caused by:
a. an increase in aggregate supply.
b. a decrease in aggregate demand.
c. an advance in technology.
d. government deregulation of industry.
ANSWER: b
19. Fiscal policy refers to:
a. changes in the money supply designed to achieve full employment.
b. changes in government regulations designed to achieve full employment.
c. special incentives given to businesses to hire groups with traditionally high unemployment
rates.
d. changes in taxes and government spending designed to achieve full employment.
ANSWER: d
20. Monetary policy is conducted by:
a. the Federal Reserve.
b. the federal government.
c. state governments.
d. commercial banks.
ANSWER: a
21. Expansionary monetary policy refers to:
a. an increase in the growth rate of the money supply.
b. a decrease in the growth rate of the money supply.
c. a decrease in the growth rate of bank deposits.
d. increased taxes.
ANSWER: a
22. The economy may continue to experience cyclical unemployment because:
a. it is difficult to use stabilization policy in a timely manner.
b. policymakers may not know if fiscal or monetary policy is more appropriate.
c. policymakers know precisely how much to change government spending or the money
supply in order to achieve full employment.
d. policymakers are willing to enact the appropriate policy regardless of the political
consequences.
ANSWER: a
23. Which of the following is most likely to result in a decrease of structural unemployment?
a. Increases in government spending.
b. Decreases in taxes.
c. Increases in the rate of growth in the money supply.
d. Job training programs.
ANSWER: d
24. Stabilization policies will probably be needed to deal with unemployment if:
a. aggregate demand falls and input prices are not "sticky."
b. aggregate demand falls and input prices are "sticky."
c. aggregate demand increases and input prices are not "sticky."
d. aggregate demand increases and input prices are "sticky."
ANSWER: b
Test Bank  451
25. An increase in the minimum wage is likely to:
a. cause unemployment among high-skill workers.
b. cause unemployment among low-skill workers.
c. increase the income of labor.
d. increase on-the-job training opportunities.
ANSWER: b
26. The minimum wage will likely:
a. have little positive impact on the condition of the working poor.
b. have a significant positive impact on the condition of the working poor.
c. significantly increase the income of the working poor.
d. increase employment among the working poor.
ANSWER: a
27. Which of the following statements is correct?
a. Unemployment is more a more severe problem in the United States than in most European
countries.
b. Most economists think that expansionary fiscal policies would not be very effective in
dealing with unemployment in most European countries.
c. Unemployment problems in most European countries tend to be problems with short-term
unemployment.
d. Labor unions in the United Stated have been more effective in gaining wage increases for
their members than have labor unions in most European countries.
ANSWER: b
28. Which of the following results in impediments to hiring in most European nations?
a. relatively low minimum wages.
b. relatively generous unemployment benefits.
c. relatively long-term unemployment benefits.
d. government regulations making it difficult to start or expand new firms.
ANSWER: d
29. Which of the following results in impediments to accepting employment in most European
nations?
a. labor unions.
b. relatively high minimum wages.
c. relatively large unemployment benefits.
d. relatively low tax rates.
ANSWER: c
Critical Thinking Multiple-Choice Questions
30. Scott is laid off his job. As a result, GDP falls by $27,000. This is an example of
unemployment's:
a. economic cost to the individual.
b. economic cost to society.
c. noneconomic cost to the individual.
d. noneconomic cost to society.
ANSWER: b
452  Chapter 14/Unemployment: A Recurring Problem
31. Rich is laid off his job. As a result, his income falls by $35,000. This is an example of
unemployment's:
a. economic cost to the individual.
b. economic cost to society.
c. noneconomic cost to the individual.
d. noneconomic cost to society.
ANSWER: a
32. As a result of unemployment, Michelle becomes addicted to alcohol. This is an example of:
a. the noneconomic cost of unemployment.
b. the economic cost of unemployment.
c. the market cost of unemployment.
d. the nonmarket cost of unemployment.
ANSWER: a
33. Suppose the population 16 of years of age or older is 3,000,000, the number of people in the
civilian labor force is 2,225,000, and the number of unemployed is 117,925. The unemployment
rate is:
a. 7.4 percent.
b. 5.3 percent.
c. 3.9 percent.
d. 3 percent.
ANSWER: b
34. Suppose the population 16 of years of age or older is 4,000,000, the number of employed is
2,700,000, and the number of unemployed is 200,000. The unemployment rate is:
a. 7.4 percent.
b. 6.9 percent.
c. 4.5 percent.
d. 5.0 percent.
ANSWER: b
35. Jack works part-time while going to college. Jack would be classified as:
a. employed.
b. unemployed.
c. not in the civilian labor force.
d. a home production worker.
ANSWER: a
36. Jack holds two part-time jobs to make ends meet. He loses one of them for sleeping on the job.
Jack would be classified as:
a. employed.
b. unemployed.
c. not in the civilian labor force.
d. a home production worker.
ANSWER: a
Test Bank  453
37. Sally quits her job and decides to go on a vacation to recover from hard work over the past
several years. Sally would be classified as:
a. employed.
b. unemployed.
c. not in the civilian labor force.
d. a home production worker.
ANSWER: c
38. After their second child was born, Brian decided to stay at home to be with the children. Brian
would be classified as:
a. employed.
b. unemployed.
c. not in the civilian labor force.
d. a home production worker.
ANSWER: c
39. Jack is an assembly line worker at an automobile plant. He has not worked for the past three
weeks because the union has gone on strike. Jack is considered to be:
a. employed.
b. unemployed.
c. not a member of the labor force.
d. a discouraged worker.
ANSWER: a
Use the following information to answer questions 40 – 41.
Homemakers
Retired Persons
College Students
Part-time Workers
Full-time Workers
Persons 16 years of age and older
actively seeking employment
Individuals on strike
55,000
25,000
32,000
39,120
523,700
23,680
5,500
40. The number of persons in the civilian labor force is:
a. 679,000.
b. 595,200.
c. 592,000.
d. 586,500.
ANSWER: c
41. The unemployment rate is:
a. 7 percent.
b. 6 percent.
c. 5 percent.
d. 4 percent.
ANSWER: d
454  Chapter 14/Unemployment: A Recurring Problem
42. Which of the following would be most likely to suffer from unemployment?
a. a 34 year old female.
b. a 40 year old male.
c. a 17 year old male.
d. a 30 year old Hispanic male.
ANSWER: c
43. Which of the following groups is likely to have the highest unemployment rate?
a. teenagers.
b. males.
c. females.
d. Hispanics.
ANSWER: a
44. Suppose the unemployment rate increases. Which of the following groups is likely to have the
most adverse affect?
a. whites.
b. blacks.
c. Hispanics.
d. workers over the age of 20.
ANSWER: b
45. Jennifer has just graduated from college with a computer science degree. She is temporarily
experiencing unemployment while she searches for a job. She would currently be:
a. cyclically unemployed.
b. structurally unemployed.
c. frictionally unemployed.
d. technically unemployed.
ANSWER: c
46. Leslie was laid off her job because of cutbacks in production. At each place she applies for a job,
she finds numerous other applicants. Leslie is most likely suffering from:
a. structural unemployment.
b. cyclical unemployment.
c. frictional unemployment.
d. temporary unemployment.
ANSWER: b
47. Tamika worked as an accountant for the past twenty years in an accounting firm. Recently
Tamika was laid off as the firm fully computerized the operations. Tamika is experiencing:
a. structural unemployment.
b. cyclical unemployment.
c. frictional unemployment.
d. displacement unemployment.
ANSWER: a
Test Bank  455
48. Robert has worked for the past twenty years on an assembly line at a General Motors plant.
Recently Robert was laid off as robots were put on the line. Robert is experiencing:
a. structural unemployment.
b. cyclical unemployment.
c. frictional unemployment.
d. displacement unemployment.
ANSWER: a
49. An increase in the natural rate of unemployment would most likely result from an increase:
a. in the proportion of the labor force that is 16 - 19 years of age.
b. in the proportion of the labor force that is over 19 years of age.
c. in the proportion of the labor force that is male.
d. in the proportion of the labor force that is Caucasian.
ANSWER: a
50. If taxes decrease, there will be:
a. an increase in aggregate quantity demanded.
b. a decrease in aggregate quantity demanded.
c. an increase in aggregate demand.
d. a decrease in aggregate demand.
ANSWER: c
51. Which of the following is likely to lead to a increase in aggregate demand?
a. contractionary fiscal policy.
b. expansionary monetary policy.
c. contractionary monetary policy
d. the interest rate effect.
ANSWER: b
52. If full employment GDP is $6,000 billion and actual GDP is $5,500 billion, the economy is most
likely experiencing:
a. problems with unemployment.
b. problems with inflation.
c. too rapid economic growth.
d. a lack of technological innovation.
ANSWER: a
53. Suppose GDP is currently at the full employment level. If authorities enact a tax increase, this
will lead to:
a. unemployment.
b. inflation.
c. increased economic growth.
d. a fall in the rate of unemployment.
ANSWER: a
456  Chapter 14/Unemployment: A Recurring Problem
54. Suppose GDP is currently at the full employment level. It aggregate demand falls, this will most
likely lead to:
a. inflation.
b. an increase in output.
c. no change in output.
d. unemployment.
ANSWER: d
55. Suppose GDP is currently at the full employment level. If authorities enact a tax decrease, this
will lead to:
a. unemployment.
b. increases in output.
c. an increase in the price level.
d. economic growth.
ANSWER: c
56. Suppose GDP is currently below the full employment level. The most appropriate stabilization
policy would be to:
a. increase taxes.
b. increase in the growth rate in the money supply.
c. decrease government spending.
d. increase interest rates.
ANSWER: b
57. Suppose at full employment, the level of GDP is $15 trillion. Currently output is $13.5 trillion.
The most appropriate stabilization policy would be to:
a. decrease taxes.
b. decrease in the growth rate in the money supply.
c. decrease government spending.
d. increase interest rates.
ANSWER: a
58. If households and firms become pessimistic about the future of the economy:
a. aggregate supply will increase, resulting in inflation.
b. aggregate supply will decrease, resulting in unemployment.
c. aggregate demand will increase, resulting in inflation.
d. aggregate demand will decrease, resulting in unemployment.
ANSWER: d
Use the following diagram to answer questions 59 – 63.
Test Bank  457
GDP Deflator
AS
.C
.
.A
B
AD
AD 3
1
AD 2
0
Real GDP
59. Suppose the economy is currently in equilibrium at point A. If households decrease spending,
this would most likely:
a. shift aggregate demand from AD1 to AD2.
b. cause unemployment.
c. cause the equilibrium level of real GDP and the equilibrium price level to fall.
d. all of the above.
ANSWER: d
60. If the economy is currently in equilibrium at point B:
a. authorities should increase government spending.
b. authorities should increase taxes.
c. authorities should decrease the growth rate of the money supply.
d. authorities should enact regulations to curb inflation.
ANSWER: a
61. Suppose the economy is currently in equilibrium at point A. If government increases spending,
this would most likely:
a. shift aggregate demand from AD1 to AD2.
b. shift aggregate demand from AD1 to AD3.
c. cause unemployment.
d. cause the equilibrium level of real GDP and the equilibrium price level to fall.
ANSWER: b
62. Suppose the economy is currently in equilibrium at point A. If consumption spending increases,
this would most likely:
a. cause deflation.
b. cause inflation.
c. cause unemployment.
d. increase the equilibrium level of real GDP.
ANSWER: b
458  Chapter 14/Unemployment: A Recurring Problem
63. If the economy is currently in equilibrium at point B, increasing the money supply would:
a. cause the equilibrium level of real GDP and the equilibrium price level to rise.
b. cause the equilibrium level of real GDP and the equilibrium price level to fall.
c. cause the equilibrium level of real GDP rise and the equilibrium price level to fall.
d. cause the equilibrium level of real GDP fall and the equilibrium price level to rise.
ANSWER: a
64. Which of the following is most likely to result in an increase in structural unemployment?
a. Increases in government spending.
b. Decreases in taxes.
c. Increases in the rate of growth in the money supply.
d. Rapid advances in technology.
ANSWER: d
Use the following diagram to answer questions 65 – 68.
Wage
S
W2
W
1
W3
D
0
N
2
N1
N3
Employment
65. The imposition of a minimum wage would:
a. increase the wage from W1 to W2.
b. decrease the wage from W2 to W1.
c. decrease the wage from W1 to W3.
d. cause the equilibrium wage to increase.
ANSWER: a
66. The imposition of a minimum wage would:
a. create an excess demand for labor of N1 to N3.
b. create an excess supply of labor of N1 to N3.
c. create an excess demand for labor of N2 to N3.
d. create an excess supply of labor of N2 to N3.
ANSWER: d
67. As a result of the minimum wage:
a. N2 to N3 workers are laid off.
b. N2 to N1 workers are laid off.
c. N1 to N3 workers are laid off.
d. the demand for labor will decrease.
ANSWER: b
Test Bank  459
68. As a result of the minimum wage:
a. N2 to N3 workers enter the market, but cannot find jobs.
b. N2 to N1 workers enter the market, but cannot find jobs.
c. N1 to N3 workers enter the market, but cannot find jobs.
d. the demand for labor will increase.
ANSWER: c
69. The minimum wage would have the most adverse effect on which of the following groups?
a. Females.
b. Males.
c. Hispanics.
d. Teenagers.
ANSWER: d
Essay and Discussion Questions
1. Evaluate the following statement. "Government can use expansionary fiscal and
monetary policies to deal with unemployment."
The government can use expansionary policies to deal with cyclical unemployment; however,
the student should be aware of the fact that expansionary policies will be of little use in dealing
with unemployment caused by structural changes in the economy or frictional unemployment.
2. "Reducing cyclical unemployment is possible, but only at the expense of higher price
levels." Is this statement true or false? Defend your answer.
The student should employ the aggregate demand-aggregate supply model to answer this
question. By using this model it is possible to show, that use of expansionary policy will
increase aggregate demand, increase real GDP, and decrease unemployment. At the same time,
the increase in aggregate demand will cause the price level to increase. The closer the economy
is to full employment, the greater the rise in the price level for any given increase in aggregate
demand.
3. "Increases in aggregate demand will always result in an increase in employment." Is this
statement true or false? Defend your answer.
This statement is false. By using the aggregate demand-aggregate supply model, the student can
show that if the economy is currently operating at the full employment level of GDP increases in
aggregate demand will only increase the price level. Output, and hence employment, will be
unaffected.
4. Evaluate the following statement. "A computerized national job bank would significantly
reduce frictional unemployment."
The impact of such a job bank on frictional unemployment is not clear. It would reduce such
unemployment by making more information available to both job seekers and prospective
employers. On the other hand, the availability of better information may increase worker
turnover because it would make finding a job easier.
5. Evaluate the following statement. "Expansionary fiscal and monetary policies should be
fairly successful in dealing with structural unemployment."
Expansionary fiscal and monetary policies will increase aggregate demand. This, in turn, will
lead to an increase in output and employment. However, the problem with structural
unemployment is not necessarily a lack of jobs. Instead, structural unemployment arises due to a
460  Chapter 14/Unemployment: A Recurring Problem
mismatch between the skills of job seekers and the requirements of available jobs. Expansionary
fiscal and monetary policies do not address this problem.
6. Is the following statement true or false? Defend your answer. "Expansionary fiscal and
monetary policies would not be very effective in dealing with the unemployment problems
experienced by most European nations."
This statement is correct. Most economists believe that unemployment rates are high in many
European nations because of structural impediments that discourage employment. Expansionary
fiscal and monetary policies do not address such impediments. As a result, such policies would
likely have little or no effect on unemployment rates. Instead, they would simply cause prices to
increase more rapidly.
Problems
Use the following information to answer questions 1 – 3.
Persons over 65 years not actively seeking employment
Persons over 65 years actively seeking employment
Homemakers
Population under 16 years
Military personnel
Persons 16 years and older working
Persons 16 years and older not working because of
illness, labor disputes, vacation, bad weather,
or personal reasons
Persons between 16 and 65 years actively seeking
employment
65,000
8,500
78,000
101,000
72,000
720,000
31,000
9,500
1. Calculate the number of persons in the civilian labor force.
The number of persons in the civilian labor force is 769,000 (8,500 + 720,000 + 31,000 + 9,500).
2. Calculate the number of persons who are unemployed.
The number of unemployed persons is 18,000 (8,500 + 9,500).
3. Calculate the unemployment rate to the nearest hundredth.
The unemployment rate is 2.34 percent [(18,000/769,000) x 100].
4. Suppose the number of people aged 16 - 65 is 4,000,000. The number of these individuals
who are working full time is 2,000,000, those working part-time is 650,000, and those not
working, but seeking employment is 106,000. What is the unemployment rate?
The unemployment rate is 3.8 percent ([106,000/(2,000,000 + 650,000 + 106,000)] x 100).
5. Given the following information, find the number of persons in the civilian labor force.
Full-time students
Homemakers
Retired persons
Persons working at least 15 hours in
a family business without pay
Working part-time
75,000
49,000
43,000
25,000
71,000
Test Bank  461
Working full-time
Discouraged workers
Persons seeking employment
125,500
6,000
6,500
The number of persons in the civilian labor force is 228,000 (25,000 + 71,000 + 125,500 +
6,500).