Tutorial 4
Chapter 5: Labour markets and unemployment
Question 1
Assume an economy with homogeneous labour and that the labour market is in equilibrium.
The market clearing real wage equals 100 units of goods. The government introduces a
minimum wage of 80 units of goods. Which ONE of the following will be the consequence of
this government policy?
a. The equilibrium rate of unemployment will increase.
b. Involuntary unemployment will rise.
c. Employment will remain unchanged.
d. The equilibrium real wage will rise.
Question 2
When does involuntary unemployment exist?
a. When unemployed workers could be hired for jobs that are different from the job for which
they have been specifically trained.
b. When unemployed workers would be willing to work, but only for a wage that is above
that being paid to employed workers.
c. When unemployed workers would be willing to work at the wage being paid to employed
workers but cannot find employment.
d. When employers are faced with a shortage of workers that is completely independent of
the wages that the employers would be willing to pay them.
Question 3
Which ONE of the following is true of the minimum wage?
a. It is a source of unemployment should it exceed the marginal productivity of workers.
b. It is always a cause of unemployment.
c. It provides protection for the least skilled workers.
d. It is set to maximize employment.
Question 4
If wages were perfectly flexible and labour were completely homogeneous, which ONE of
the following would be true of an increase in immigration?
a. It would lead to an increase in the real wage and a reduction in employment.
b. It would lead to a reduction in the real wage and an increase in employment.
c. It would lead to a reduction in both the real wage and employment.
d. It would have no effect on either the real wage or employment.
Question 5
Compared to individual labour supply, aggregate labour supply in an economy without
unions is which ONE of the following?
a. More elastic, because employers prefer to bargain with individual workers.
b. Less elastic, because employers prefer to bargain with individual workers.
c. More elastic, because new workers choose to enter the labour force as wages rise.
d. Less elastic, because new workers choose to enter the labour force as wages rise.
Question 6
The steady-state unemployment rate depends [(A)________] on the job separation rate and
[(B)_________] on the job-finding rate.
a. (A) positively; (B) positively
b. (A) positively; (B) negatively
c. (A) negatively; (B) positively
d. (A) negatively; (B) negatively
Open question: Exercise 1 from the book.
Extra questions: Exercises 2, 6, 9, and 10 from the book.
Chapter 6: Money, prices, and exchange rates in the long run
Multiple choice questions
Question 1
Assume that real GDP is growing at a constant A per cent per year and that the nominal
money supply is growing at a constant rate of B per cent per year: in the long run, we would
expect the inflation rate to be equal to C per cent. Which ONE of the following combinations
would you expect to hold?
a. A: 6; B: 4; C: 2
b. A: 4; B: 6; C: 2
c. A: 4; B: 4; C: 4
d. None of the answers given.
Question 2
Suppose that the nominal exchange rate has depreciated at a rate of 10 per cent per year and
the domestic inflation rate has been 9 per cent per year, while the foreign inflation rate has
been equal to 12 per cent per year. From this information, which ONE of the following would
be true of the real exchange rate?
a. It has depreciated at a rate of 13 per cent per year.
b. It has depreciated at a rate of 7 per cent per year.
c. It has appreciated at a rate of 7 per cent per year.
d. It has appreciated at a rate of 13 per cent per year.
Question 3
The diagram above illustrates two money market equilibria for the long run according to the
Cambridge equation for money demand. Which of the following interpretations of the figure
is consistent with the theory?
a. Income has increased from period 1 to period 2, resulting in a corresponding increase in
the price level.
b. The stock of money has increased from period 1 to period 2, resulting in an increase in
the price level.
c. The price level has increased from period 1 to period 2, resulting in an increase in the
money stock.
d. Both the price level and the stock of money have increased from period 1 to period 2 in
response to economic growth (i.e. Y has increased from period 1 to period 2).
Question 4
Suppose you want to buy a car. You either want to buy a Chevrolet for US$ 23.000, a
Volkswagen for € 15.900, a Honda for ¥ 2.2 million or a Hyundai for 22 million
Korean won. The following exchange rates are given.
American dollar
European euro
Japanese yen
Korean won
Foreign currency per euro
1.25
1.00
132.5
1401.13
Which currency has to appreciate for the cheapest car to become more expensive?
a. American dollar
b. European euro
c. Japanese yen
d. Korean won
Extra questions: Exercises 2 and 5 from the book.