Unemployment Overview Quiz

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Questions and Answers

What is the primary cause of cyclical unemployment?

Workers being discouraged and leaving the labor force

A mismatch of skills in the labor market

Recession in the economy (correct)

Individuals transitioning between jobs

How is the unemployment rate calculated?

Unemployed divided by the labor force (correct)

Unemployed divided by total population

Employed plus unemployed

Employed divided by total population

Which scenario accurately defines structural unemployment?

Recent graduates seeking better job opportunities

Workers laid off during a recession

Industries reducing labor due to economic downturns

Workers without the necessary skills for available jobs (correct)

What effect does expansionary monetary policy have on interest rates?

Interest rates are decreased Signup and view all the answers

What is the discouraged-worker effect?

When individuals stop looking for jobs after failing to find one Signup and view all the answers

Which statement describes frictional unemployment?

Individuals between jobs or seeking better opportunities Signup and view all the answers

What is one effect of increased government spending in expansionary fiscal policy?

Higher disposable income for consumers Signup and view all the answers

Which category of unemployment involves individuals who have the skills but cannot find jobs?

Structural unemployment Signup and view all the answers

Which of the following is NOT a purpose of protectionism?

Increasing competition from foreign firms Signup and view all the answers

How can tariffs benefit a government?

By increasing government revenue Signup and view all the answers

What distinguishes Foreign Direct Investment (FDI) from Portfolio Investment?

FDI consists of investing directly in business operations. Signup and view all the answers

What is the primary focus of comparative advantage?

Producing goods at a lower opportunity cost than another country Signup and view all the answers

Which of the following statements best describes absolute advantage?

A country can produce more goods using the same resources than another. Signup and view all the answers

What does the service balance in the current account measure?

The value of exported services versus imported services Signup and view all the answers

What is the role of quotas in trade protection?

To restrict the volume of imported goods Signup and view all the answers

What is a consequence of a trade deficit?

Reduction in the ability to pay for essential goods Signup and view all the answers

Which of the following is a characteristic of hot money flows?

They respond quickly to interest rate changes. Signup and view all the answers

What is one of the benefits of international trade?

Increased economic growth and higher incomes Signup and view all the answers

What is one potential disadvantage of international trade?

Increased economic and political dependence Signup and view all the answers

What is the primary objective of imposing an embargo?

To restrict certain goods and services Signup and view all the answers

Which aspect of capital account transactions is associated with short-term investments?

Hot Money Flows Signup and view all the answers

Why were the Corn Laws enacted by the British Parliament?

To discourage imports and encourage exports Signup and view all the answers

How does specialization contribute to international trade?

It allows countries to produce goods at lower opportunity costs. Signup and view all the answers

What justification is often presented for protectionist policies?

To save domestic jobs by encouraging the purchase of local goods Signup and view all the answers

What is the formula for calculating the Balance on Current Account?

Merchandise Trade Balance + Service Balance + Net Investment + Unrequited Transfers Signup and view all the answers

In a floating exchange rate system, what occurs when demand for a currency increases?

Supply of the currency decreases and value increases. Signup and view all the answers

Which of the following is a disadvantage of a floating exchange rate?

Volatility and uncertainty for businesses and investors. Signup and view all the answers

What can result from a fixed exchange rate being set inappropriately?

Deflation or inflation Signup and view all the answers

What distinguishes a fixed exchange rate from a floating one?

Governments set the currency value compared to others. Signup and view all the answers

What is one function of exchange rates?

Facilitating trade of foreign goods and services Signup and view all the answers

What does the Merchandise Trade Balance represent?

Merchandise exports divided by merchandise imports. Signup and view all the answers

Which of the following is NOT a factor influencing exchange rates?

Technological advancements in banking Signup and view all the answers

What is the Basic Balance composed of?

Balance on Current Account, Long-term Capital Account, Errors and Omissions. Signup and view all the answers

According to the Law of One Price, what should happen to the price of the same good across different countries?

They should be the same when adjusted for exchange rates Signup and view all the answers

What does the Purchasing Power Parity (PPP) theory indicate?

Changes in price levels lead to adjustments in exchange rates Signup and view all the answers

How does a country provide liquidity when it supplies its currency in exchange for foreign assets?

This operation is treated as a debit in the balance of payments. Signup and view all the answers

What must the sum of the Balance of Payments equal?

Zero. Signup and view all the answers

Study Notes

Unemployment

Unemployment rate measures the percentage of the labor force that is unemployed.
Labor force includes employed and unemployed individuals.
Not in labor force refers to individuals not actively seeking work such as retirees, students, or discouraged workers.
Discouraged-worker effect occurs when individuals stop actively seeking work due to difficulty finding jobs, therefore reducing the unemployment rate, but not necessarily indicating an improved job market.
Underemployment occurs when individuals are employed, but not fully utilizing their skills, education, or experience, which can lead to lower wages than desired.
Key categories of unemployment:
- Cyclical unemployment: Unemployment due to economic downturns or recessions.
- Frictional unemployment: Short-term unemployment caused by individuals in between jobs, seeking better opportunities, or recent graduates entering the workforce.
- Structural unemployment: Long-term mismatch between the skills workers possess and the skills demanded by available job openings.
The cost of unemployment includes:
- Loss of job skills and human capital.
- Reduced output, leading to a decline in the production of goods and services.
- Decreased government revenue due to reduced tax collection.
- Increased social problems such as poverty, crime rates, and social unrest.

Expansionary Monetary Policy

Aims to stimulate economic activity, combat unemployment, and increase aggregate demand.
Reduces interest rates, leading to increased borrowing and spending.
Increases the money supply through open market operations, injecting more funds into circulation.

Expansionary Fiscal Policy

Governments increase spending and/or reduce taxes to boost economic activity.
Increased government spending creates jobs and stimulates demand, increasing overall economic activity.
Reduced taxes increase disposable income, leading to higher consumer spending.

Comparative Advantage

A country has a comparative advantage in producing a good or service if it can produce that specific good or service at a lower opportunity cost than other countries.
Encourages specialization and trade, resulting in mutually beneficial outcomes for all participating countries.

Absolute Advantage

A country has an absolute advantage if it can produce more of a good or service than another country using the same amount of resources.
Terms of Trade are the ratio at which a country can trade domestic products for imported products.

Advantages of International Trade

Increased output: Specialization and access to diverse markets lead to efficiency gains.
Variety of goods: Consumers have access to a wider range of goods.
Higher efficiency: Specialization leads to improved efficiency and lower production costs.
Economies of scale: Large-scale production leads to cost reductions.
Higher income and economic growth: Increased trade boosts economic activity.
Foreign exchange earnings: Exporting goods and services earns foreign currency.

Disadvantages of International Trade

Depletion of reserves: Trade deficits can deplete a country's foreign reserves.
Economic and political dependence: Developing countries can become economically reliant on developed countries, potentially leading to unfair trade practices and political influence.
High transportation costs: Moving goods and services across borders can be expensive.

Protectionism

Aims to protect domestic industries from foreign competition.
Pros: protect domestic jobs, prevent unfair trade practices (like dumping), safeguard infant industries, protect national security, address environmental concerns, and reduce trade deficits.
Cons: can raise consumer prices, stifle innovation, and lead to inefficiency.

Free Trade

Favors open markets and minimal barriers to international trade.
Pros: lower prices for consumers, increased competition, and increased economic efficiency.

The Balance of Payments (BOP)

Tracks a country's financial transactions with the rest of the world.
Current Account measures the flow of goods, services, income, and transfers.
Capital Account measures the flow of financial assets, including foreign direct investment and portfolio investment.
Financial Account tracks the flow of money related to changes in official reserves, special drawing rights from the IMF, and central bank reserves.
Errors and Omissions account for discrepancies in statistical data.
Debit (-): a transaction that supplies the country's currency.
Credit (+): A transaction that creates demand for the country's currency.

Floating Exchange Rate

Determined by market forces, primarily the demand and supply of a currency.
Appreciation: When a currency value increases due to higher demand or lower supply.
Depreciation: When a currency value decreases due to lower demand or higher supply.

Fixed Exchange Rate

The government sets a specific value for its currency compared to other currencies and actively intervenes in the market to maintain that value.

Functions of Exchange Rates

Facilitating international trade, investment, and debt payments.

Factors Influencing Exchange Rates

Demand and supply of currencies
Domestic income and expenditure levels
Output capacity and employment levels
Changes in money supply, interest rates, and inflation

The Hodge-Feedback Effect

A positive cycle of economic growth where one country's economic expansion boosts growth in other countries, and this feedback effect ultimately strengthens the initial country's economy.

Law of One Price

Identical goods should have the same price in different countries when adjusted for exchange rates.

Purchasing Power Parity (PPP)

Exchange rates should adjust to ensure the same purchasing power for goods and services in different countries.

Determinants of Imports

Consumer and investment behaviors
Relative prices of domestic and foreign goods

Determinants of Exports

Global economic activity
Comparative price levels of domestic and foreign goods

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Description

Test your understanding of unemployment concepts, including labor force participation, types of unemployment, and the discouraged-worker effect. Explore how underemployment and cyclical, frictional, and structural unemployment impact the economy. This quiz will help reinforce your knowledge on these important economic topics.