Chapter 5: Labour Economics PDF

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) In 2018, General Motors announced it would ________ the number of persons it employed and this would ________ the total number of persons unemployed in the economy....

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) In 2018, General Motors announced it would ________ the number of persons it employed and this would ________ the total number of persons unemployed in the economy. A) decrease; decrease B) decrease; increase C) constant; constant D) increase; increase E) increase; decrease Answer: B 2) The economy has gone into a recession. You have majored in computer science and, because of the recession, have difficulty in finding a job. Should you go back to school and get a second major? A) No, the recession will have no impact on my ability to get a job or my future income. B) Yes, the recession will lower income in my field permanently. C) No, the recession will most likely be short-lived and I can get a job after it is over. D) Yes, the recession will likely reduce the demand for computer science majors permanently. E) Yes, the recession will ensure that I will never find a job as a programmer. Answer: C 3) The unemployment rate is an important economic statistic that can tell us about the health of the economy. If the unemployment rate turns out to be high or higher than anticipated, we would expect A) consumer spending is likely to rise. B) it is more likely that an incumbent Prime Minister will be re-elected. C) that jobs are less difficult to find. D) that investors will be more optimistic about the economy. E) that stock prices are more likely to fall. Answer: E 4) Statistics Canada would categorize a person as ________ if they were temporarily away from their job because they were ill. A) a discouraged worker B) out of the labour force C) employed D) disabled E) unemployed Answer: C 5) Statistics Canada would categorize a retiree who is not working as A) eligible to work. B) out of the labour force. C) employed. D) a discouraged worker. E) unemployed. Answer: B 1  6) The labour force equals the number of people A) in the entire country. B) employed. C) employed plus unemployed. D) unemployed. E) in the working-age population. Answer: C 7) Suppose that homemakers are included as employed in the labour force statistics, rather than being counted as out of the labour force. This would A) increase the measured unemployment rate. B) increase the number of people not in the labour force. C) decrease the number of persons in the labour force. D) decrease the number of persons in the working-age population. E) increase the measured labour force participation rate. Answer: E Table 5.1 Total population 20,000 Working-age population 15,000 Employment 1,000 Unemployment 100 Consider the data above for a simple economy. 8) Refer to Table 5.1. The unemployment rate for this simple economy equals A) (100/15,000) × 100 percent. B) (100/20,000) × 100 percent. C) (100/1,000) × 100 percent. D) (1000/15,000) × 100 percent. E) (100/1,100) × 100 percent. Answer: E 9) Refer to Table 5.1. The labour force participation rate for this simple economy equals A) (1,000/15,000) × 100 percent. B) (1,100/15,000) × 100 percent. C) (15,000/20,000) × 100 percent. D) (1,100/20,000) × 100 percent. E) (1,000/1,100) × 100 percent. Answer: B 2 10) Suppose the working-age population of a fictional economy falls into the following categories: 90 are retired or homemakers; 60 have full-time employment; 20 have part-time employment; 20 do not have employment, but are actively looking for employment; and 10 would like employment but do not have employment and are not actively looking for employment. The official unemployment rate as calculated by Statistics Canada would equal A) (20/80) × 100%. B) (60/90) × 100%. C) (20/60) × 100%. D) (20/100) × 100%. E) (30/80) × 100%. Answer: D 11) Suppose the labour force stays constant, and the working-age population stays constant, but a greater number of persons who were unemployed become employed. The labour force participation rate will A) decrease. B) remain constant. C) increase and then decrease. D) increase. E) decrease and then increase. Answer: B 12) The unemployment rate equals the number of unemployed divided by the ________, all times 100. A) number of employed B) number of discouraged workers C) labour force D) total population E) working-age population Answer: C 13) Suppose the government launches a successful advertising campaign that convinces workers with high school degrees to quit their jobs and become full time students. This would cause A) the number of discouraged workers to increase. B) the labour force participation rate to decrease. C) no change in the unemployment rate. D) the employment population ratio to increase. E) the unemployment rate to decrease. Answer: B 14) Someone who is available for work but has not actively looked for work in the previous four weeks would be classified as A) not in the working-age population. B) not legally entitled to work. C) unemployed. D) not in the labour force. E) employed. Answer: D 3 15) The labour force participation rate equals the A) (labour force divided by the total population) × 100. B) (number of employed divided by the labour force) × 100. C) (labour force divided by the number of people not in the labour force) × 100. D) (working age population divided by employment) × 100. E) (labour force divided by working-age population) × 100. Answer: E 16) Which of the following labour market statistics best indicates the amount of labour that is available to the economy from a given working-age population? A) the ratio of minimum wage to inflation B) labour force participation rate C) the employment population ratio D) unemployment rate E) discouraged-worker ratio Answer: B 17) Which of the following cause the unemployment rate as measured by Statistics Canada to understate the true extent of joblessness? A) a shrinking working age population B) inflation C) unemployed persons falsely report themselves to be actively looking for a job D) people employed in the underground economy E) discouraged workers Answer: E 18) Which of the following cause the unemployment rate as measured by Statistics Canada to overstate the true extent of joblessness? A) counting people as employed who are working part time, although they would prefer to be working full time B) people choosing not to participate in the labour force C) unemployed persons falsely report themselves to be actively looking for a job D) discouraged workers E) inflation Answer: C 19) Which of the following explains the changes in the Canadian adult male labour force participation rate since 1976? A) There are fewer working age males than in the past. B) Younger men are remaining in school longer as compared to the past. C) More men are joining the military as compared to the past. D) Fewer men consider themselves discouraged workers as compared to the past. E) More men are retiring later in life as compared to the past. Answer: B 20) In November 2018, Canada saw an increase of ________ jobs for the same time the previous year. A) 3.1 percent B) 123,000 C) 5.1 percent D) 163,000 E) 21,500 Answer: D 4 21) The recession that followed the global financial crisis of 2007-2009 caused ________ in Canada. A) an increase in the duration a typical unemployed person was out of work B) less government spending C) a rise in the labour force participation rate D) less unemployment E) a drop in the working age population Answer: A 22) Since 1976, the labour force participation rate for adult men has ________ and for adult women has ________. A) increased; increased B) increased; decreased C) decreased; remained constant D) decreased; increased E) remained constant; increased Answer: D 23) Using a broader measure of the unemployment rate where discouraged workers and part-time workers who wished to work full time were counted as unemployed, you would expect this unemployment rate to ________ compared to the Statistics Canada measured unemployment rate. A) fall by half B) increase C) more than double D) decrease E) barely change Answer: B 24) In the modern Canadian economy, the typical unemployed person stays unemployed for A) a long time during expansions and short time during recessions. B) a relatively short time, less than 13 weeks. C) a permanent time. D) an amount of time that is hard to quantify. E) a relatively long time, over a year. Answer: B 25) An issue with the Labour Force Survey (LFS) which overstates the extent of joblessness is A) individuals who are working but concealing it for legal reasons are counted as unemployed. B) there is no distinction between employees who work part-time but would like to have a full-time job and those who are content with their full- or part-time job. C) people who choose not to work are counted as unemployed. D) they tend to count unemployed people more often because they are not working. E) they verify claims that people have actively looked for work. Answer: A 26) The most important group not identified by the unemployment rate is A) seniors. B) those under the minimum working age. C) students. D) discouraged workers. E) part-time workers seeking full-time work. Answer: D 5  27) Which of the following statements is true about the Canadian economy? A) Each year many more jobs are destroyed than are created. B) Each year, many new jobs are created, but few existing jobs are destroyed, and the unemployed find jobs quickly. C) Each year, few new jobs are created, but few existing jobs are destroyed, keeping unemployment low. D) Each year few jobs are created, and therefore it takes the unemployed a long time to find a new job. E) Each year, many new jobs are created and many existing jobs are destroyed. Answer: E TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 28) Counting part-time workers who are looking for full-time work as employed overstates the degree of joblessness in the economy. Answer: True False 29) In Canada, the typical person who has lost his or her job finds another one in a few months except during severe recessions. Answer: True False 30) The labour force participation rates of women have rapidly increased since 1976. Answer: True False 6 ESSAY. Write your answer in the space provided or on a separate sheet of paper. 31) Fill in the missing values in the table of data collected in the fictitious Labour Force Survey below. Show your work. Working-age population Employment Unemployment Unemployment rate 5.4% Labour force 135,113 Labour force participation rate 67.0% Answer: Working-age population 201,661 Employment 127,817 Unemployment 7,296 Unemployment rate 5.4% Labour force 135,113 Labour force participation rate 67.0% Unemployed Unemployment rate = × 100. Labour force Unemployed = (Labour force × Unemployment rate)/100 (135,113 × 5.4)/100 = 7,296 Labour force = Employed + Unemployed Employed = Labour Force - Unemployed Employed = 135,113 - 7,296 = 127,817 Labour force Labour force participation rate = × 100. Working-age population Labour force = (Working-age population × Labour force participation rate) × 100 Working-age population = (Labour force/Labour force participation rate) × 100 Working-age population = (135,113/67) × 100 = 201,661 7 32) Fill in the missing values in the table of data collected in the fictitious Labour Force Survey below. Show your work. Working-age population 235,900 Employment Unemployment Unemployment rate 9.4% Labour force Labour force participation rate 65.5% Answer: Working-age population 235,900 Employment 139,991 Unemployment 14,524 Unemployment rate 9.4% Labour force 154,515 Labour force participation rate 65.5% Labour force Labour force participation rate = × 100. Working-age population Labour force = (Working-age population × Labour force participation rate)/100 Labour force = (235,900 × 65.5)/100 = 154,515 Unemployed Unemployment rate = × 100. labour force Unemployed = (Labour force × Unemployment rate)/100 (154,515 × 9.4)/100 = 14,524 Labour force = Employed + Unemployed Employed = Labour force - Unemployed Employed = 154,515 - 14,524 = 139,991 33) Statistics Canada counts as employed people who work part-time, but would prefer to work full-time. Suppose the people who had part-time jobs, but wanted full-time jobs, were counted as unemployed. Explain how the unemployment rate and the labour force participation rate would change. Answer: The unemployment rate would increase and the labour force participation rate would stay the same. The number of unemployed would rise, but the labour force would stay the same. The part-time workers who wanted to be full-time workers would simply go from being employed to unemployed. With no change in the labour force, the labour force participation rate would not change. 34) Statistics Canada does not count discouraged workers as unemployed. Suppose discouraged workers were counted as unemployed. Explain how the unemployment rate and the labour force participation rate would change. Answer: Both the unemployment rate and the labour force participation rate would increase. The number of unemployed would rise, as would the labour force. The unemployment rate would rise because adding the same number to the numerator and the denominator of a fraction that is less than one increases the value of the fraction. The labour force participation rate would rise because the labour force increases with no change in the working-age population. 8 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 35) The labour force is the sum of A) employed workers and discouraged workers. B) employed workers and the working age population. C) employed workers and unemployed workers. D) unemployed workers and the working age population. E) employed workers and individuals not looking for work. Answer: C 36) Upon your graduation from university, you find that the economy is in recession and the unemployment rate is relatively high. Nonetheless, you continue along your career path looking for a new job because A) high unemployment rates do not usually last for very long. B) the wages of university graduates do not fall during recession. C) recessions typically last longer than it takes to complete a second university degree. D) looking for work is your only option. E) the cost of additional education is always higher during recession. Answer: A 37) The unemployment rate is A) the percentage of the working-age population that is unemployed. B) the percentage of the working-age population that is employed. C) the percentage of the labour force that is employed. D) the percentage of the labour force that is unemployed. E) the percentage of the population that is unemployed. Answer: D 38) A full-time student who is not working is categorized as A) a discouraged worker. B) unemployed. C) employed. D) frictionally unemployed. E) not in the labour force. Answer: E 39) Discouraged workers are classified by Statistics Canada as A) employed. B) part of the labour force. C) part-time employees. D) unemployed. E) out of the labour force. Answer: E 40) Discouraged workers are A) workers who find their current jobs unfulfilling and are considering a job change. B) workers who have consistently been looking for work for more than 4 weeks. C) workers who are disappointed in the labour force because they are over qualified for their current jobs. D) workers who have a part time job but want a full time job. E) workers who have stopped looking for work because they believe there are no jobs for them. Answer: E 9 41) The labour force participation rate is defined as A) the percentage of the working-age population that is employed. B) the percentage of the labour force that is unemployed. C) the percentage of the working-age population that is unemployed. D) the percentage of the working-age population in the labour force. E) the percentage of the labour force that is employed. Answer: D 42) Mike has been unemployed for over a year. He hasn't looked for a job in the last three months, but he's just started looking for work again. Because Mike started looking for a new job, A) the employment population ratio has decreased. B) the unemployment rate decreased. C) the unemployment rate increased. D) the working-age population increased. E) the labour force participation rate decreased. Answer: C 43) During the month of May, 300,000 workers moved from being classified as "unemployed" to being classified as "employed." As a result, A) the labour force participation rate fell. B) the labour force participation rate rose. C) the employment population ratio fell. D) the unemployment rate rose. E) the unemployment rate fell. Answer: E 44) Which of the following would reduce the labour force participation rate, all else equal? A) an increase in the number of people in the labour force B) a decrease in the unemployment rate C) an increase in the working-age population D) an increase in the unemployment rate E) an increase in minimum working age Answer: C 45) Jack lost his job six months ago and he's been actively looking for a new job ever since. Statistics Canada would classify Jack as A) a discouraged worker. B) an involuntary part-time worker. C) unemployed. D) out of the labour force. E) all of the above Answer: C 46) Which of the following causes the unemployment rate to understate the true extent of joblessness? A) Discouraged workers are not counted as unemployed. B) Persons who collect unemployment benefits report themselves to be searching for a job. C) A drug dealer reports herself as unemployed. D) Many full-time workers really want to be part-time workers. E) Some people do not want to have a paid job. Answer: A 10 47) An increase in the size of the underground economy would A) cause the labour force participation rate to fall. B) cause the labour force participation rate to rise. C) cause the official unemployment rate to fall as more people find jobs outside the formal economy. D) raise the employment population ratio as reported by Statistics Canada. E) have no effect on the official unemployment rate. Answer: A 48) The federal government legalized marijuana in 2017. Before this change Statistics Canada would have considered people who made their living growing and selling marijuana for recreational use to be A) employed full time. B) unemployment. C) not in the labour force. D) employed part time. E) not legally entitled to work in Canada. Answer: C 49) After the legalization of recreational marijuana, the labour force participation rate would A) rise. B) fall. C) fall then rise. D) rise then fall. E) remain unchanged. Answer: A 50) If the number employed is 17.5 million, the working-age population is 28.5 million, and the number unemployed is 1.4 million, then the unemployment rate is A) 7.4%. B) 8%. C) 5%. D) 4.7%. E) 61%. Answer: A 51) If the number employed is 190 million, the number unemployed is 10 million, and the working-age population is 250 million, then the labour force participation rate is A) 4%. B) 5.2%. C) 60%. D) 76%. E) 80%. Answer: E 52) Except for recessions, the duration of unemployment for the typical person lasts A) less than 4 weeks. B) less than 13 weeks. C) 14 to 25 weeks. D) more than 25 weeks. E) over five years. Answer: B 53) Except for expansions, the least amount of time of unemployment for the typical person lasts A) less than 4 weeks. B) less than 13 weeks. C) 14 to 25 weeks. D) more than 25 weeks. E) over five years. Answer: C 11 54) If the number of unemployed workers is 2 million and the number in the labour force is 28 million, what is the unemployment rate? A) 0.7% B) 4% C) 7% D) 9% E) 40% Answer: C 55) If the number of unemployed workers is 20 million, the number of employed workers is 30 million, and the working-age population is 80 million, what is the labour force participation rate? A) 12.5% B) 18% C) 37.5% D) 40% E) 62.5% Answer: E 56) If the number of unemployed workers is 1.9 million, the number in the working-age population is 50 million, and the unemployment rate is 4%, what is the labour force participation rate? A) 4.75% B) 7.8% C) 63% D) 95% E) 96.2% Answer: D 57) If the number of unemployed workers is 1.9 million, the number in the working-age population is 50 million, and the unemployment rate is 4%, how many workers are in the labour force? A) 1 million B) 20 million C) 47.5 D) 48.1 E) 50 million million million Answer: C 58) Which of the following describes actual trends in the Canadian labour force participation rate? A) The labour force participation rate of adult women has fallen since 1976. B) The labour force participation rate of adult men not in school, but too young to retire has risen since 1976. C) The labour force participation rate of all adults has fallen since 1976. D) The labour force participation rate of adult women has risen since 1976. E) The labour force participation rate of adult men has risen since 1976. Answer: D 59) How would including members of the military in employment, labour force, and working-age population statistics affect the unemployment rate and the labour force participation rate? A) Including members of the military would reduce the unemployment rate and increase the labour force participation rate. B) Including the military would increase both the unemployment rate and the labour force participation rate. C) Including the military would not change either the unemployment rate or the labour force participation rate. D) Including members of the military would increase the unemployment rate and reduce the labour force participation rate. E) Including the military would reduce both the unemployment rate and the labour force participation rate. Answer: A 60) In recent years, the most common length of time for a person to be unemployed was A) less than 4 weeks. B) 5 to 13 weeks. C) 14 to 25 weeks. D) 26 weeks to 42 weeks. E) 42 weeks or more. Answer: A 12  61) Jack was unemployed two weeks ago but just started a new job. As a result of this increase in the number of employed workers, which of the following occurred? A) The labour force participation rate increased. B) The employment population ratio decreased. C) The unemployment rate increased. D) The labour force participation rate decreased. E) The unemployment rate decreased. Answer: E 62) Jack just received a promotion at work and now works 50 hours per week instead of 35. As a result, A) the unemployment rate decreased. B) the unemployment rate increased. C) the labour force participation rate increased. D) both the unemployment rate and the labour force participation rate changed. E) neither the unemployment rate nor the labour force participation rate changed. Answer: E 63) For the last few decades, the labour force participation rates of men have ________, and the labour force participation rates of women have ________. A) fallen; risen B) risen; fallen C) fallen; fallen D) remained constant; risen E) risen; risen Answer: A TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 64) The labour force survey asks adults about their employment status and is used to compile the monthly unemployment rate. Answer: True False 65) The labour force survey is compiled from firms who answer questions about the number of persons who are employed and on the company payroll. Answer: True False 66) In the labour force survey, all people are categorized as either employed or unemployed. Answer: True False 67) The labour force participation rates of men have gradually increased since 1975. Answer: True False SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 68) How could a growing labour force lead to an increase in the unemployment rate? Answer: The labour force is calculated as the sum of employed workers and unemployed workers in the economy. If the labour force is growing and, simultaneously, the unemployment rate is increasing, the number of people in the labour force classified as unemployed workers must be increasing. 13 69) How would the unemployment rate and the labour force participation rate change if discouraged workers were counted as unemployed rather than as out of the labour force? Illustrate this using the formulae for both measurements. Answer: The unemployment rate is calculated as: number of unemployed × 100 labour force Including discouraged workers would increase the number of people counted as being in the labour force and would increase the number of people counted as unemployed. In terms of our calculation, the numerator would rise, and the denominator would rise. However, the numerator would rise by a greater percentage than the denominator, as the denominator is the sum of employment plus unemployment. If the top number rises more quickly than the bottom number, then the whole number rises. This would increase the unemployment rate. The labour force participation rate is calculated as: labour force × 100 working-age population Including discouraged workers would increase the number of people in the labour force, but not change the number of people in the working-age population. This would increase the labour force participation rate because the numerator increases. Increasing the numerator of a fraction increases the fraction. 70) Suppose 180,000 people are employed, 20,000 people are unemployed, the working-age population is 250,000, and 50,000 people are out of the labour force. Calculate the unemployment rate. Answer: The unemployment rate is calculated as: number of unemployed × 100 labour force The labour force is the sum of those employed plus the unemployed. This is 180,000 plus 20,000, which equals 200,000 people. Substituting this information into our equation, we get: 20,000 × 100 200,000 which equals 10%. 14  71) Suppose 180,000 people are employed, 20,000 people are unemployed, and 50,000 people are out of the labour force. Calculate the labour force participation rate. Answer: The labour force participation rate is calculated as: labour force × 100 working-age population The labour force is the sum of those employed plus the unemployed. This is 180,000 plus 20,000, which equals 200,000 people. The working-age population is the sum of those in the labour force and those out of the labour force. This is 200,000 plus 50,000, which equals 250,000. Substituting this information into our equation, we get: 200,000 × 100 250,000 which equals 80%. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 72) Frictional unemployment is the result of A) a persistent mismatch between the skills and characteristics of workers and the requirements of the jobs. B) the search process of matching workers with jobs. C) the changing of the seasons. D) a slowdown in the economy. E) the ups and downs in inflation. Answer: B 73) The advice to "keep searching, there are plenty of jobs around here for which you are qualified," would be most appropriate for which of the following types of unemployment? A) frictional unemployment B) structural unemployment C) geographical unemployment D) seasonal unemployment E) cyclical unemployment Answer: A 74) A student who just graduated from college but has not found a job would most likely be A) seasonally unemployed. B) frictionally unemployed. C) structurally unemployed. D) underemployed. E) cyclically unemployed. Answer: B 75) Cyclical unemployment is the result of A) the search process of matching workers with jobs. B) the ups and downs in inflation. C) regional differences in the economy. D) a slowdown in the economy. E) a persistent mismatch between the skills and characteristics of workers and the requirements of the jobs. Answer: D 15 76) Structural unemployment is the result of A) the entry of new workers into the labour force. B) a slowdown in the economy. C) the search process of matching workers with jobs. D) the ups and downs in inflation. E) a persistent mismatch between the skills and characteristics of workers and the requirements of the jobs. Answer: E 77) In December 2015, CHCH TV cut 129 full-time positions in its local news division. The laid-off employees who were not able to find jobs at another television news station due to a permanent decline in local news programming would be considered A) structurally unemployed. B) cyclically unemployed. C) seasonally unemployed. D) frictionally unemployed. E) permanently unemployed. Answer: A 78) According to the text, economists consider full employment to occur when A) frictional unemployment equals zero. B) everyone who wants a job has a job. C) structural unemployment is less than 2 percent. D) the unemployment rate consists of only frictional and structural unemployment. E) the sum of frictional unemployment and structural unemployment equals zero. Answer: D 79) If cyclical unemployment is eliminated in the economy, then A) the unemployment rate is below the natural rate of unemployment. B) the economy is considered to be at full employment. C) the unemployment rate will be zero. D) the economy is at less than full employment. E) the unemployment rate is above the natural rate of unemployment. Answer: B 80) Full employment is not considered to be zero unemployment, because A) some people do not want a job. B) some cyclical unemployment always exists. C) not everyone is entitled to work in Canada. D) people do not find jobs instantaneously. E) there are not enough jobs for everyone who wants one. Answer: D 81) The natural rate of unemployment is the amount of unemployment A) equal to frictional plus structural unemployment. B) equal to frictional and cyclical unemployment. C) that exists when the economy goes into recession. D) equal to seasonal and cyclical unemployment. E) that exists when the economy is in an expansion. Answer: A 16 82) During the recession of 2008-2009, cyclical unemployment increased as the recession continued. This increase in cyclical unemployment A) had no effect on the natural rate of unemployment. B) increased the natural rate of unemployment. C) decreased the natural rate of unemployment. D) increased the structural rate of unemployment. E) decreased the structural rate of unemployment. Answer: A 83) Throughout 2016, Alberta's oil and gas sector laid-off thousands of workers due to low oil prices. If oil prices do not recover, these unemployed workers would be classed as A) frictionally unemployed. B) cyclically unemployed. C) structurally unemployed. D) seasonally unemployed. E) naturally unemployed. Answer: C 84) In 2016, thousands of workers were laid-off in Alberta's oil and gas sector due to low prices for crude oil. Workers outside the oil and gas sector who lose their jobs due to the increase in unemployment would be classed as A) frictionally unemployed. B) cyclically unemployed. C) structurally unemployed. D) underemployed. E) seasonally unemployed. Answer: B 85) A lumberjack loses his job because timber cutting restrictions were imposed by the Environment Canada to protect the spotted owl habitat. This lumberjack would be A) cyclically unemployed. B) legally unemployed. C) structurally unemployed. D) seasonally unemployed. E) frictionally unemployed. Answer: C 86) If you have trouble finding a job because of a slowdown in the overall economy, we would say that you are A) naturally unemployed. B) frictionally unemployed. C) cyclically unemployed. D) structurally unemployed. E) seasonally unemployed. Answer: C 17  87) The advice to "retrain" would be most appropriate for which of the following types of unemployment? A) cyclical unemployment B) frictional unemployment C) core unemployment D) structural unemployment E) seasonal unemployment Answer: D 88) If the federal government implements programs so that the unemployed are more quickly matched with jobs, then A) the natural rate of unemployment will decrease. B) the natural rate of unemployment will increase. C) the natural rate of unemployment will not change. D) the natural rate of unemployment could either increase or decrease. E) the natural rate of unemployment will rise then fall. Answer: A TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 89) Eliminating frictional unemployment would be good for the economy. Answer: True False 90) Unemployment caused by a business cycle recession is called cyclical unemployment. Answer: True False 91) The natural rate of unemployment consists of frictional unemployment plus structural unemployment. Answer: True False ESSAY. Write your answer in the space provided or on a separate sheet of paper. 92) To understand why someone cannot get a job, it helps to know the four types of unemployment. List the four types of unemployment and explain what causes each type. What advice for finding a job would be appropriate for someone in each type of unemployment? Answer: Frictional unemployment is the unemployment that arises from the process of matching workers with jobs. These workers are qualified; they just need to search for a job. The advice for finding a job would be to keep searching, because there are jobs available for which they are qualified. Structural unemployment is unemployment arising from a persistent mismatch between the skills and characteristics of workers and the requirements of the jobs. The advice for finding a job would be to retrain so that they can match up with the requirements of current jobs. Cyclical unemployment is unemployment caused by a business cycle recession. The advice for finding a job would be to hang in there and continue searching, but realize that there are less jobs available than the number of applicants. The cyclically unemployed person could perhaps get a temporary job until the economy picks up, or perhaps consider continuing his or her education while the business cycle slowdown lasts. Seasonal unemployment is unemployment due to time or season of the year. The seasonally unemployed person could consider searching of employment in an industry with a different season, or perhaps retraining for jobs that do not depend so much on seasonal factors. 18  93) Many of the reasons why someone cannot get a job are similar to the reasons why someone cannot get a date. Using the ideas of frictionally unemployed, structurally unemployed, and cyclically unemployed, describe and explain how a student at your university might be frictionally "undated," structurally "undated," seasonally "undated", and cyclically "undated." Answer: The frictionally "undated" student does not have a date because of the search process of matching up people. It is an information search problem. There are lots of other students who would go out with the student, but it takes time to find them. The structurally "undated" student does not match up with the characteristics of the other students looking for dates. Perhaps the structurally "undated" student is considerably older, from another region or country, or just has different preferences. The cyclically "undated" student does not have a date because there are not many dates to be had there is a recession in dates. This might be due to an increase in the popularity of a new video game which makes people less interested in dating. The seasonally undated student does not have a date because no one is going on dates at this time of year. This could be during final exams when most students do not date because they're studying. 94) A central concept in macroeconomics is the idea of the natural rate of unemployment. Why does it make sense to define full employment to occur when the unemployment rate equals the natural rate of unemployment, instead of when the unemployment rate equals zero? Elaborate and explain carefully. Answer: With a growing, dynamic economy where businesses expand and contract, technological change regularly occurs, and people enter and leave the labour market on a continual basis, zero percent unemployment is not possible nor desirable. Frictional unemployment and structural unemployment are normal parts of a healthy, growing economy. With frictional unemployment, people and firms have to search for one another and that takes time. With structural unemployment, technology changes and international competition cause people to have to retrain to match up with the evolving job requirements. Economists, consequently, consider full employment to occur when the only unemployment is frictional unemployment and structural unemployment. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 95) The short-term unemployment arising from the process of matching workers with jobs is called A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) seasonal unemployment. E) unnatural unemployment. Answer: A 96) Unemployment arising from a persistent mismatch between the skills and characteristics of workers and the requirements of jobs is called A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) seasonal unemployment. E) unnatural unemployment. Answer: B 19  97) Workers laid off as a result of a recession suffer A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) seasonal unemployment. E) natural unemployment. Answer: C 98) People who lost their jobs as hand-drawn animators because of the popularity of computer-generated 3D animation are examples of persons who are suffering A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) seasonal unemployment. E) unnatural unemployment. Answer: B 99) Which of the following is an example of a worker experiencing cyclical unemployment? A) a lifeguard who was hired during the summer season is laid off after summer is over B) a worker who changes jobs to move closer her family C) a Canadian Pacific Railway employee who got laid off because of the recession of 2008-2009 D) a worker who quits his job because he does not get along with his boss E) an assembly-line worker who loses his job because of automation Answer: C 100) Jack just told his boss that he thinks his boss is an idiot. It is likely that Jack will be experiencing ________ unemployment in the near future. A) permanent B) structural C) cyclical D) seasonal E) frictional Answer: E 101) Sarah is a full-time student who is not looking for work. What kind of unemployment is Sarah experiencing? A) cyclical B) seasonal C) frictional D) structural E) none Answer: E 102) Emma is a road construction worker. During the winter months, Emma finds it more difficult to get work. The unemployment Emma experiences in the winter is A) functional. B) cyclical. C) structural. D) seasonal. E) voluntary. Answer: D 103) Which of the following is an example of a worker experiencing frictional unemployment? A) an employee who is laid off because the economy is suffering a recession B) an Air Canada pilot who loses her job because of lack of demand for air travel C) a computer programmer who loses her job because it is outsourced to India D) a worker who quits his job at the post office to find more interesting work E) a road worker laid off in the winter Answer: D 20 104) An example of a seasonally unemployed worker would be A) a software engineer who is laid off because of declining demand for the software he writes. B) a day care provider who quits his job to go back to school. C) a General Motors who employee loses her job because the company is downsizing its work force. D) a mother who quits her job to stay home with her children. E) a ski lift operator who loses his job when the snow melts in the spring. Answer: E 105) What are the three main kinds of unemployment? A) frictional, seasonal, and cyclical B) structural, frictional, and cyclical C) temporary, permanent, and volunteer D) cyclical, structural, and temporary E) involuntary part-time, structural, and seasonal Answer: B 106) When the labour market is at full employment, A) there is only cyclical unemployment in the economy. B) the unemployment rate is 0%. C) frictional unemployment is less than 2% D) there is only structural unemployment in the economy. E) there is no cyclical unemployment in the economy. Answer: E 107) When an economy is at its natural rate of unemployment, which of the following will be true? A) The unemployment rate will be greater than 0%. B) The unemployment rate will be 0%. C) The labour force participation rate will be 100%. D) The employment population ratio will be 80%. E) Only structural unemployment as a result of technological change will exist in the economy. Answer: A 108) The natural rate of unemployment is made up of A) frictional and structural unemployment. B) seasonal and structural unemployment. C) cyclical and structural unemployment. D) frictional and cyclical unemployment. E) frictional, cyclical, and structural unemployment. Answer: A 109) An increase in cyclical unemployment will result in A) an increase in the unemployment rate. B) a decrease in frictional unemployment. C) an increase in the employment population ratio. D) an increase in the natural rate of unemployment. E) an increase in structural unemployment. Answer: A 21  110) We say that the economy is at full employment if the unemployment rate is equal to A) the amount of cyclical unemployment. B) the sum of frictional and cyclical unemployment. C) zero. D) the natural rate of unemployment. E) the sum of structural and cyclical unemployment. Answer: D 111) In December 2015, CHCH TV laid-off 129 employees from its local news division. If these lay-offs occurred because advertisers cut back their spending due to a slowdown in the economy, the former local news division workers would be classed as A) seasonally unemployed. B) cyclically unemployed. C) not in the labour force. D) structurally unemployed. E) frictionally unemployed. Answer: B TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 112) The natural rate of unemployment consists of frictional unemployment plus cyclical unemployment. Answer: True False 113) Eliminating all structural unemployment would be good for the economy. Answer: True False 114) The full-employment rate of unemployment is zero. Answer: True False SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 115) Describe the three types of unemployment. Answer: Frictional unemployment is short-term unemployment that arises from the process of matching workers with jobs. Structural unemployment arises from a persistent mismatch between the skills and attributes of workers and the requirements of jobs. Cyclical unemployment is caused by a business cycle recession. 116) Explain what economists mean by full employment and why this rate of unemployment is not zero. Answer: Full employment occurs in the macro economy when cyclical unemployment is zero. The full-employment rate of unemployment is then made up of the frictional rate of unemployment and the structural rate of unemployment. Because it will always take time to find a job, frictional unemployment will never be zero. Also, because demand and technology are constantly changing in an economy, structural unemployment will never be zero. That is, some workers will always lose their jobs as the demands for the products they make fall or disappear entirely. 117) What is the natural rate of unemployment, and what types of unemployment constitute the natural rate of unemployment? Answer: The natural rate of unemployment is the rate of unemployment that exists in the economy when cyclical unemployment is zero. This underlying level of unemployment in the economy consists of frictional and structural unemployment. The natural rate of unemployment is also known as the full-employment rate of unemployment. 22 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 118) An increase in Employment Insurance payments would, in effect, ________ the amount of time spent searching for a job, which would increase ________ unemployment. A) decrease; frictional B) decrease; cyclical C) increase; structural D) increase; frictional E) increase; cyclical Answer: D 119) Which of the following would increase the unemployment rate? A) a decrease in the minimum wage B) a period of high economic growth C) an increase in employment insurance payments D) a law making it illegal to work more than 35 hours per week E) a cut in employment compensation Answer: C 120) Which of the following would decrease the unemployment rate? A) an increase in the minimum wage B) government aid to retrain unemployed workers C) an increase in the efficiency wage D) an increase in labour union membership E) an increase in the generosity of Employment Insurance payments Answer: B 121) Which of the following policies would reduce structural unemployment? A) an increase in the minimum wage B) a job retraining program C) building an online job database that helps workers find jobs D) expanding employment insurance to cover more workers E) a government spending program designed to shorten recessions Answer: B 122) Which of the following policies would reduce frictional unemployment? A) building an online job database that helps workers find jobs B) a job retraining program C) an increase in the generosity of Employment Insurance payments D) implementing an unemployment insurance policy E) a decrease in the minimum wage Answer: A 123) The Employment Insurance program has which of the following effects? A) It increases the amount of time spent searching for a job. B) It reduces structural unemployment. C) It decreases the amount of personal income of the unemployed. D) It lowers the overall unemployment rate. E) It contributes to the severity of a recession or economic downturn. Answer: A 23 124) In Canada the Employment Insurance (EI) will tend to ________ the opportunity cost of continuing to search for a job, and generally will ________ the unemployment rate. A) increase; lower B) lower; lower C) lower; increase D) increase; increase E) increase; not impact Answer: C 125) The increased generosity of unemployment insurance programs in Canada as compared to the United States should A) have no impact on the duration of unemployment in Canada. B) decrease the duration of unemployment in Canada as compared to the United States. C) raise the duration of unemployment in the United States. D) increase the duration of unemployment in Canada as compared to the United States. E) raise Canada's structural unemployment relative to the United States. Answer: D 126) If the minimum wage is set above the market wage, A) frictional unemployment will increase. B) the quantity of labour supplied will be below the quantity of labour demanded. C) unemployment will rise. D) highly-skilled workers will have a harder time finding jobs. E) All of the above are correct. Answer: C 127) Minimum wage laws cause unemployment because the legal minimum wage is set A) above the market wage, causing labour demand to be greater than labour supply. B) too low compared the market wage, causing labour demand to collapse. C) below the market wage, causing labour demand to be less than labour supply. D) above the market wage, causing labour demand to be less than labour supply. E) below the market wage, causing labour demand to be greater than labour supply. Answer: D 128) If the government of Alberta announces that it would raise the minimum wage in the province from $11.20 an hour to $15 an hour, which of the following is most likely to occur as a result of the new minimum wage? A) an increase in the employment population ratio B) a decrease in unemployment C) an increase in unemployment D) a decrease in prices E) a decrease in automation Answer: C 129) Suppose more Canadian retail firms decided to pay efficiency wages. As a result, we would expect A) long run unemployment trends to reverse. B) the labour force participation rate to fall. C) the average wage to fall. D) the average wage rate to rise. E) the employment population ratio to rise. Answer: D 24  130) If firms pay what are called "efficiency wages," they pay wages that A) motivate workers to increase their productivity. B) are negotiated by labour unions. C) will eventually lower the unemployment rate. D) are lower than average to ensure maximum profit. E) are mandated by the government. Answer: A 131) Efficiency wages cause unemployment because A) firms pay wages that are below the market wage, causing the quantity of labour demanded to be less than the quantity of labour supplied. B) firms pay wages that are above the market wage, causing the quantity of labour demanded to increase in all industries. C) firms pay wages that are above the market wage, causing the quantity of labour demanded to be less than the quantity of labour supplied. D) firms pay wages that are below the market wage, causing the quantity of labour demanded to be greater than the quantity of labour supplied. E) firms pay wages that are above the market wage, causing the quantity of labour demanded to be greater than the quantity of labour supplied. Answer: C TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 132) The unemployment rate in Canada is typically higher for teenagers relative to other workers in part because of the impacts of minimum wage laws. Answer: True False 133) Most economists believe that labour unions significantly increase the overall unemployment rate in Canada. Answer: True False 134) Efficiency wage is another name for the minimum wage. Answer: True False ESSAY. Write your answer in the space provided or on a separate sheet of paper. 135) Discuss the likely impact of each of the following on the unemployment rate. a. The length of time workers are eligible to receive Employment Insurance payments is cut in half. b. The government passes a law making labour unions illegal. c. The minimum wage is raised by 50 percent. d. The government funds an Internet site where companies can post job openings at no charge. Answer: a. The unemployment rate will likely decrease, since decreasing the time people are eligible to receive Employment Insurance benefits will increase the opportunity cost of searching for a job. b. This will likely have little effect on the unemployment rate as unions cover relatively little of the Canadian labour force. c. The unemployment rate will likely increase since an increase in minimum wage will raise the wage above the market wage for some workers. d. The unemployment rate will likely decrease, since making information on job openings more available lowers the search involved in frictional unemployment. 25  136) What are some reasons why many economists still think Employment Insurance (EI) is a good idea for Canada, despite the fact it prolongs job search and increases the unemployment rate? Answer: If not for the EI program, unemployed workers would suffer very large declines in their income, which would lead them to greatly reduce spending, which would make any recession worse. EI helps the unemployed maintain their incomes and spending, which also reduces the personal hardship of being unemployed. Finally, EI helps both workers and firms make "good matches." Allowing unemployed people spend more time searching for an appropriate job that means more people find jobs that are appropriate to their skills and tastes. The better the match between employer and employee, the more productive the economy will be. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 137) The Employment Insurance program A) increases cyclical unemployment. B) pays the unemployed a benefit equal to twice the average wage. C) eliminates structural unemployment. D) increases the amount of time the unemployed spend searching for a job. E) decreases the level of frictional unemployment. Answer: D 138) By offering training to workers whose firms laid them off because of competition from foreign firms, the federal government is attempting to reduce A) seasonal unemployment. B) unnatural unemployment. C) structural unemployment. D) frictional unemployment. E) cyclical unemployment. Answer: C 139) Establishing a federal employment agency that speeds up the process of matching unemployed workers with unfilled jobs is an attempt to lower A) structural unemployment. B) seasonal unemployment. C) cyclical unemployment. D) frictional unemployment. E) unnatural unemployment. Answer: D 140) Which of the following explains why Canada tends to have unemployment rates that are higher than the United States? A) The minimum wage in Canada is lower than it is in the United States. B) Canada offers more generous unemployment benefits than the United States. C) Technological change occurs at a faster rate in Canada, so structural unemployment is higher in Canada. D) Seasons play a bigger role in the Canadian economy than in the American economy. E) Firms in Canada offer employees higher wages and higher benefits than do firms in the United States. Answer: B 26 141) Despite increasing the unemployment rate, the Employment Insurance program can improve the economy by A) allowing workers the time needed to find a job that is a good match for their skills. B) creating an incentive for workers to put a lot of effort into their jobs. C) increasing the need for government. D) creating an incentive for firms to hire more workers. E) keeping unmotivated people out of the labour force. Answer: A 142) Except during recessions, workers in Canada are eligible for unemployment benefits for about twice as long a period of time as workers in the United States. As a result, A) cyclical unemployment is higher, on average in Canada than in the United States. B) the unemployment rate in Canada is usually higher than in the United States. C) the opportunity cost of job search in Canada is lower than in the United States. D) the average duration of unemployment is longer in the United States than in Canada. E) frictional unemployment is higher, on average, in the United States than in Canada. Answer: B 143) Which of the following has a tendency to raise the unemployment rate? A) offering wages at the market-clearing rate B) implementing a minimum wage in an economy C) reducing labour unions' membership in an economy D) reducing unemployment insurance in an economy E) introducing programs that retrain workers displaced by technological change Answer: B 144) An efficiency wage A) is higher than the market wage and tends to increase productivity. B) is lower than the market wage and tends to increase unemployment. C) is higher than the market wage and tends to decrease productivity. D) is lower than the market wage and tends to increase productivity. E) is lower than the market wage and tends to decrease productivity. Answer: A 145) Why might firms pay wages that are above the equilibrium wage in a market? A) to avoid federal corporate income taxes B) to reduce profit C) to encourage workers to form labour unions D) to increase the productivity of their workers E) to reduce the unemployment rate Answer: D 146) The equilibrium wage in a local labour market is $12 per hour. If a minimum wage of $15 per hour is imposed, which of the following will occur? A) There will be a decrease in the quantity of labour supplied by households. B) There will be an increase in unemployment. C) There will be a decrease in automation. D) There will be an increase in the quantity of labour demanded by firms. E) All of the above will occur. Answer: B 27  147) The equilibrium wage in a local labour market is $15 per hour. If a minimum wage of $13 per hour is imposed, which of the following will occur? A) There will be an increase in the quantity of labour supplied by households. B) There will be a decrease in unemployment. C) There will be an increase in automation. D) There will be a decrease in the quantity of labour demanded by firms. E) All of the above will occur. Answer: B Figure 5.1 148) Refer to Figure 5.1. Based on the graph of the labour market above, if a minimum wage of $16 per hour is imposed, which of the following will result? A) The quantity of labour demanded by firms will rise. B) The quantity of labour demanded by firms will fall. C) The unemployment rate will fall. D) The quantity of labour supplied by households will fall. E) None of the above will occur. Answer: B 149) Refer to Figure 5.1. Based on the graph of the labour market above, if a minimum wage is set at $10 per hour, which of the following will occur? A) The unemployment rate will fall. B) The unemployment rate will rise. C) The level of unemployment will fall, but the percentage of the labour force unemployed will not change. D) The level of unemployment will rise, but the percentage of the labour force unemployed will not change. E) None of the above will occur. Answer: E 28  150) Labour unions cause unemployment because the union contract wage is set A) above the market wage, causing a surplus of labour. B) equal to the market clearing wage. C) above the market wage, causing a shortage of labour. D) below the market wage, causing a surplus of labour. E) below the market wage, causing a shortage of labour. Answer: A 151) Observing that Costco pays its employees much more than Walmart does leads economists to think A) Walmart is consistently breaking Canada's labour laws. B) Costco's owners are not interested in maximizing profits. C) Costco is paying an efficiency wage in an effort to maximize profit. D) Costco employees have a powerful union. E) Costco's ownership must be more motivated by fairness than Walmart. Answer: C TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 152) The unemployment rate has historically been higher in Canada than in the United States. Answer: True False 153) The unemployment rate is higher with a minimum wage law than it would be without a minimum wage law. Answer: True False 154) Paying efficiency wages are a way for a company to cut costs and become more efficient, and are therefore lower than market wages. Answer: True False SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 155) What effect does the Employment Insurance program have on the unemployment rate? Answer: The Employment Insurance program likely raises the unemployment rate. The employment insurance payments lower the opportunity cost (the salary that the unemployed are giving up by not working) of continuing to search for a job, which leads the unemployed to spend more time searching for a job. 156) Why would a firm pay efficiency wages? Answer: An efficiency wage is a wage that is higher than the market wage. Firms pay efficiency wages to raise productivity. Studies show that workers are motivated to work harder if they are paid higher wages. Put differently, a firm does not monitor workers as closely in order to get them to be more productive. The higher wage motivates them to be productive. 29 ESSAY. Write your answer in the space provided or on a separate sheet of paper. 157) Some of the people advocating large increases in the minimum wage, use the theory of efficiency wages to counter the claim that large increases in the minimum wage increase unemployment. a. What are efficiency wages? b. What is likely to happen if the minimum wage were set equal to the efficiency wage? Explain. Answer: a. Efficiency wages are wages above the market wage voluntarily paid by an employer to increase the productivity of the firm's workers. b. If all firms pay the same efficiency wage, say due to a minimum wage, the higher wages would have a much smaller impact on productivity than if only a few firms pay an efficiency wage. Part of the reason why efficiency wages increase productivity is they increase the cost of getting fired for not working very hard. Efficiency wages also tend to make workers feel better about their employers and thus more likely to work hard. These effects disappear if all firms are paying the same efficiency wage. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 158) The average price of goods and services in the economy is also known as A) the cost of living. B) a market basket. C) average expenditure. D) the inflation rate. E) the price level. Answer: E 159) If the price level rose in three consecutive years from 100 to 120 to 140, then the annual inflation rate over those years would A) increase. B) decrease. C) equal 20%. D) remain the same. E) cannot be determined. Answer: A 160) Which of the following is true about the consumer price index? A) It updates yearly to allow for new products to be added to the market basket. B) It updates yearly to account for changes in the places where people shop. C) It assumes that consumers purchase the same amount of each product in the market basket each month. D) It accounts for people switching to goods whose prices have fallen. E) It filters out the part of price increases that occurs because of quality improvements in products. Answer: C 161) Which of the following price indices comes closest to measuring the cost of living of the typical household? A) producer price index B) house price index C) consumer price index D) GDP deflator E) household price index Answer: C 30  162) Which of the following would be the best measure of the cost of living? A) real GDP per person B) real GDP C) purchasing managers' index D) consumer price index E) GDP deflator Answer: D 163) The consumer price index is the A) cost of a market basket of goods and services typically consumed in the base year. B) cost of a market basket of goods and services typically consumed in the current period. C) average price of consumer data purchased from Facebook. D) average of the prices of the goods and services purchased by a typical urban family of four. E) average of the prices of new final goods and services produced in the economy over a period of time. Answer: D Table 5.2 Base Year (2012) 2020 Product Quantity Price Price Milk 50 $1.20 $1.50 Bread 100 1.00 1.10 164) Refer to Table 5.2. Assume the market basket for the consumer price index has two products bread and milk with the above values in 2012 and 2020 for price and quantity. The Consumer Price Index for 2020 equals A) 118. B) 116. C) 86. D) 85. E) 76. Answer: B Table 5.3 Base Year (2012) 2020 Product Quantity Price Price Cokes 100 $0.50 $0.75 Hamburgers 200 2.00 2.50 CDs 10 20.00 21.00 165) Refer to Table 5.3. Assume the market basket for the consumer price index has three products Cokes, hamburgers, and CDs with the above values in 2012 and 2020 for price and quantity. The Consumer Price Index for 2020 equals A) 75. B) 93. C) 108. D) 121. E) 132. Answer: D 31 Table 5.4 Base Year (2012) 2020 Product Quantity Price Quantity Price Meat 100 $10 120 $12 Potatoes 200 2 180 3 166) Refer to Table 5.4. Assume the market basket for the consumer price index has two products meat and potatoes with the above values in 2012 and 2020 for price and quantity. The Consumer Price Index for 2020 equals A) 125. B) 129. C) 135. D) 141. E) 153. Answer: B 167) The percent increase in the CPI from one year to the next is a measure of the A) GDP deflator. B) inflation rate. C) GDP growth rate. D) real interest rate. E) unemployment rate. Answer: B 168) Assume the average annual CPI values for 2019 and 2020 were 207.3 and 215.3, respectively. What was the percent increase in the CPI between these two years? A) 0.96 B) 1.04 C) 3.86 D) 8.0 E) 9.16 Answer: C 169) A consumer price index of 160 in 2020 with a base year of 2012 would mean that the cost of the market basket A) equaled $160 in 2012. B) equaled $160 in 2020. C) rose 60% from the cost of the market basket in the base year. D) rose 160% from the cost of the market basket in the base year. E) is 160 times more than it cost in 2012. Answer: C Table 5.5 Year CPI 2019 207 2020 215 170) Refer to Table 5.5. Consider the above values of the consumer price index for 2019 and 2020. The inflation rate for 2020 was equal to A) 215 B) 21.5 C) 8.0 percent. D) 3.9 percent. E) 2.5 percent. percent. percent. Answer: D 32 Table 5.6 Year CPI 2017 157 2018 161 2019 163 171) Refer to Table 5.6. Consider the above values of the consumer price index for 2017, 2018, and 2019. The inflation rate for 2018 was equal to A) 1.2 percent. B) 2.0 percent. C) 2.5 percent. D) 4.0 percent. E) 5.2 percent. Answer: C 172) Refer to Table 5.6. Consider the above values of the consumer price index for 2017, 2018, and 2019. The inflation rate for 2019 was equal to A) 1.2 percent. B) 2.0 percent. C) 2.5 percent. D) 4.0 percent. E) 5.2 percent. Answer: A 173) Your grandfather tells you that he earned $5,000/year in his first job in 1971. You earn $45,000/year in your first job in 2017. You know that average prices have risen steadily since 1961. You earn A) less than 9 times as much as your grandfather in terms of real income. B) more than 9 times as much as your grandfather in terms of real income. C) less than 9 times as much as your grandfather in terms of nominal income. D) more than 9 times as much as your grandfather in terms of nominal income. E) 9 times as much as your grandfather in terms of real income. Answer: A 174) If we want to use a measure of inflation that foreshadows price changes before they affect prices at the retail level, we would base our measure of inflation on A) the Baltic dry index. B) the producer price index. C) the consumer price index. D) the GDP deflator. E) the household price index. Answer: B 175) The substitution bias in the consumer price index refers to the idea that consumers ________ the quantity of products they buy in response to price, and the CPI does not reflect this and ________ the cost of the market basket. A) do not change; underestimates B) change; underestimates C) do not change; overestimates D) do not change; does not change E) change; overestimates Answer: E 33 176) The increase in quality bias in the consumer price index refers to the idea that price increases in the CPI reflect pure inflation, but ________ quality increases. This causes the CPI to ________ the cost of the market basket. A) not; understate B) also; not change C) also; understate D) also; overstate E) not; overstate Answer: E 177) The "new product bias" in the consumer price index refers to the idea that A) new products' prices often decrease after their initial introduction, and the CPI is adjusted infrequently and overestimates the cost to consumers. B) new products are often over represented in the basket as consumers move quickly to adopt new technology and then buy fewer units as time passes. C) consumers prefer new goods, even if they are worse in quality than old goods, and this causes the CPI to underestimate the cost to consumers. D) consumers switch to new goods when the prices of old goods increase, and the CPI overestimates the cost to consumers. E) consumers switch to old goods when the prices of new goods increase, and the CPI underestimates the cost to consumers. Answer: A 178) The iPhone 7 was launched without a headphone jack. This "innovation" is will mean A) the CPI will understate inflation due to the new product bias. B) the CPI will overstate inflation due to the outlet bias as people buy new phones at iStores. C) the CPI will understate inflation due to the outlet bias. D) the CPI will understate inflation as cheap headphones must be replaced with more expansive wireless ones. E) the CPI will overstate inflation because lack of a headphone jack is an example of a quality improvement. Answer: D 179) The consumer price index implicitly assumes that the demand curve for each good and service in the representative market basket is A) vertical. B) negatively sloped. C) positively sloped. D) backward bending. E) horizontal. Answer: A 180) Most economists believe that the biases in the consumer price index cause the CPI to overstate the true inflation rate by about A) one to two percentage points. B) one-half to one percentage point. C) more than two percentage points. D) one and one-half percentage points. E) one quarter percentage point. Answer: B 34  181) Which of the following would be a consequence of substitution bias in the CPI? A) Businesses would overcompensate employees for inflation when giving the cost of living rises. B) Economists make errors in estimating inflation when using substitutes for the CPI such as GDP deflator. C) The inflation rate based on the CPI would underestimate the true level of inflation. D) Judges would award child support payments that would not adequately keep up with the true cost of inflation. E) Social Security payments would not adequately compensate retired workers for inflation. Answer: A 182) Statistics Canada surveys 16,758 Canadian households on their spending habits. The results are used to construct a typical basket of goods and services purchased by a typical household. Which of the following is not one of the broad categories of the basket? A) stocks and savings B) shelter C) clothing and footwear D) alcohol and tobacco E) health and personal care Answer: A 183) The producer price index measures the prices that firms A) receive for the goods and services they use at all stages of production. B) receive for the goods and services they export. C) pay for labour, whether or not the labour is foreign or domestic. D) pay for imported natural resources that go into the production process. E) pay the government in taxes and licencing fees. Answer: A TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 184) The inflation rate measures the average prices of goods and services in the economy. Answer: True False 185) Cashmere socks cost 35 cents a pair in 1915. Cashmere socks now cost about $40 a pair. This means that cashmere socks are much less affordable now than in 1915. Answer: True False 186) Shelter is the largest component of the Canadian CPI market basket. Answer: True False 187) The GDP deflator is the best measure that reflects the prices of goods and services purchased by the typical household. Answer: True False 35 ESSAY. Write your answer in the space provided or on a separate sheet of paper. 188) Why does the substitution bias cause the consumer price index to overstate inflation and the cost of living? Why does the increase in quality bias cause the consumer price index to overstate inflation and the cost of living? Answer: The substitution bias causes the CPI to overstate inflation and the cost of living because the CPI, being based on a fixed market basket of goods and services, implicitly assumes that consumers do not switch away from products whose prices are rising and into products whose prices are falling (or rising less). Consumers dodge some price increases by switching to other products, therefore decreasing their cost of living below what the CPI indicates. The increase in quality bias causes the CPI to overstate inflation and the cost of living because a portion of the price increase of many goods and services is due to an increase in quality. Statistics tries to filter out the portion of the price increase due to quality, but does not fully adjust the price increase for quality improvements. Table 5.7 Base Year Price Product Quantity (2012) Price (2018) Price (2019) Tacos 5 $1.50 $2.00 $2.25 Earplugs 10 6.00 7.50 7.00 Toothbrushes 3 2.50 3.50 3.50 189) Refer to Table 5.7. Consider a simple economy that produces only three products: tacos, earplugs, and toothbrushes. Use the information in the table to calculate the inflation rate for 2019, as measured by the consumer price index. Answer: Total expenditures for 2002 = (5 × $1.50) + (10 × $6.00) + (3 × $2.50) = $75.00. Total expenditures for 2013 = (5 × $2.00) + (10 × $7.50) + (3 × $3.50) = $95.50. Total expenditures for 2014 = (5 × $2.25) + (10 × $7.00) + (3 × $3.50) = $91.75. The CPI for 2013 = [($95.50/$75.00) × 100] = 127.33; CPI for 2014 = [($91.75/$75.00) × 100] = 122.33. So, the inflation rate for 2014 = [((122.33 127.33)/127.33) × 100)] = 3.9%. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 190) The broadest measure of the price level that includes all final goods and services is A) the consumer price index. B) house price index. C) the wholesale price index. D) the producer price index. E) the GDP deflator. Answer: E 191) The most widely used measure of inflation is based on which of the following price indices? A) the S&P 500 index B) the GDP deflator C) the producer price index D) the consumer price index E) the wholesale price index Answer: D 36  192) The CPI is also referred to as A) the producer price index. B) the inflation-consumption index. C) the consumer profitability indicator. D) the GDP deflator. E) the cost-of-living index. Answer: E 193) Which of the following is the smallest portion of the market basket of goods that makes up the CPI? A) alcohol and tobacco B) shelter C) transportation D) clothing E) food Answer: A Table 5.8 CPI Year (2012 = 100) 2018 122.7 2019 124.5 194) Refer to Table 5.8. Suppose that the data in the table above reflect price levels in the economy. What is the inflation rate between 2018 and 2019? A) 1.5% B) 1.8% C) 22.7% D) 24.5% E) 101% Answer: A Table 5.9 CPI Year (2019 = 100) 2019 100 2020 120 195) Refer to Table 5.9. Suppose that the data in the table above reflect the price levels in the economy. What is the inflation rate in between 2019 and 2020? A) 2% B) 5% C) 10% D) 12% E) 20% Answer: E Table 5.10 CPI Year (2019 = 100) 2019 100 2020 113 196) Refer to Table 5.10. Suppose that the data in the table above reflect the price levels in the economy. Given that data, we can say that the cost of living rose by ________ between 2019 and 2020. A) 2% B) 5% C) 8% D) 11% E) 13% Answer: E 37 197) Monthly expenditures for a family of 4 in 2019 averaged $1,400. In 2020, the cost of the same purchases was $1,500. If 2010 is the base year, what was the CPI in 2011? A) 110 B) 107 C) 100 D) 93 E) 85 Answer: B 198) If the CPI changes from 125 to 120 between 2019 and 2020, how did prices change between 2019 and 2020? A) Prices decreased by 4%. B) Prices increased by 5%. C) Prices increased by 125%. D) Prices decreased by 5%. E) Prices increased by 25%. Answer: A 199) Which of the following describes the accuracy of the Consumer Price Index? A) Changes in the CPI understate the true rate of inflation. B) Changes in the CPI overstate the true rate of inflation. C) Changes in the CPI accurately reflect the true rate of inflation. D) Changes in the CPI accurately reflect changes in substitutes. E) Changes in the CPI accurately reflect changes in quality. Answer: B 200) If the CPI rises from 206.7 to 212.7 between two consecutive years, by how much has the cost of living changed between these two years? A) The cost of living has increased by 6%. B) The cost of living has decreased by 6%. C) The cost of living has decreased by 5.1%. D) The cost of living has increased by 12.7%. E) The cost of living has increased by 2.9%. Answer: E 201) If consumers purchase fewer of those products that increase most in price and more of those products that decrease in price as compared to the CPI basket, then A) changes in the CPI accurately reflect changes in the quality of the products. B) changes in the CPI overstate the true rate of inflation. C) changes in the CPI accurately reflect the true rate of inflation. D) changes in the CPI understate the true rate of inflation. E) changes in the CPI accurately reflect changes of the substitute products. Answer: B 202) Most economists believe that biases cause changes in the CPI to overstate the inflation rate by ________ percentage points. A) 0.1 to 0.2 B) 0.2 to 2.0 C) 0.4 D) 0.5 to 1.0 E) 1.0 to 3.0 Answer: D 203) The formula for calculating the CPI is A) (expenditures in the current year)/(average of base year and current year expenditure) × 100. B) (expenditures in the base year/expenditures in the current year). C) (expenditures in the current year × expenditures in the base year)/100. D) (expenditures in the base year × 100)/(expenditures in the current year). E) (expenditures in the current year/expenditures in the base year) × 100. Answer: E 38 204) When the price of gasoline rises, some consumers begin riding their bikes more frequently or riding the bus instead of driving their cars. The fact that the CPI does not fully account for such changes in consumer behaviour is called A) new product bias. B) outlet bias. C) increase in quality bias. D) substitution bias. E) discrimination bias. Answer: D 205) The base period for CPI calculations is generally 2002. In 2014, 55% of Canadians had a smartphone, but in 2002 almost no one had a smartphone. This potential for bias in the CPI is referred to as ________ bias and results in ________. A) new product; the CPI underestimating the true change in the cost of living B) outlet; the CPI overestimating the true change in the cost of living C) new product; the CPI overestimating the true change in the cost of living D) outlet; the CPI underestimating the true change in the cost of living E) substitution; the CPI underestimating the true change in the cost of living Answer: C 206) What is outlet bias? A) the tendency for households to spend more money over time B) the tendency for the quality of products to improve over time even though the CPI does not measure changes in quality C) the tendency for households to substitute one good for another in response to price changes D) the tendency for consumers to purchase newer, more technologically advanced products even though they have higher prices E) the tendency for households to spend their money at discount stores as prices rise Answer: E 207) More and more students are buying textbooks on online instead of in the university bookstore. The CPI does not account for this change in purchasing habits. This is an example of A) brick and mortar bias. B) outlet bias. C) increase in quality bias. D) substitution bias. E) new product bias. Answer: B 208) In 1986, an Apple IIe computer with 65 kilobytes of memory cost around $1,500. Today, a $1,500 Apple Macbook Pro computer comes with 4 gigabytes of memory. This illustrates the potential for what kind of bias in CPI calculations? A) new product bias B) outlet bias C) substitution bias D) Moore's law bias E) increase in quality bias Answer: E 39 Table 5.11 Expenditure (on base year Expenditure Price quantities) Product Quantity (2002) Price (2002) (2002) (2020) (2020) Computers 1 $1,200 $1,200 $900 $900 Books 10 25 250 30 300 Burgers 50 3 150 4 200 Total $1,600 $1,400 209) Refer to Table 5.11. Suppose an economy has only three goods and the typical family purchases the amounts given in the table above. If 2002 is the base year, then what is the CPI for 2020? A) 14.3 B) 87.5 C) 93.2 D) 114.3 E) 160 Answer: B Table 5.12 Expenditure (on base year Price Expenditure Price quantities) Product Quantity (2018) (2018) (2018) (2020) (2020) Hair cuts 6 $50 $300 $70 $420 Backpacks 4 25 100 30 120 Tacos 100 1 100 5 500 Total $500 $1,040 210) Refer to Table 5.12. Suppose an economy has only three goods and the typical family purchases the amounts given in the table above. If 2018 is the base year, then what is the CPI for 2020? A) 40.08 B) 100 C) 180 D) 208 E) 251 Answer: D 211) The PPI is the