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Unemployment and Its Natural Rate
The natural rate of unemployment is

a. zero percent.
b. the rate associated with the highest possible level of GDP.
c. the amount of unemployment that the economy normally experiences.
d. the difference between the long-run and short-run unemployment rates.
Cyclical unemployment refers to

a. the relation between unemployment and a workers changing level of experience.
b. year-to-year fluctuations of unemployment around its natural rate.
c. long-term trends in unemployment.
d. None of the above are correct.
Cyclical unemployment is closely associated with

a. short-run ups and downs of the economy.
b. long-term economic growth.
c. fluctuations in the natural rate of unemployment.
The natural rate of unemployment

a. is a constant.
b. is the desirable rate of unemployment.
c. is impervious to economic policy.
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
d.
None of the above are correct.
Data on unemployment is reported

a. weekly.
b. monthly.
c. quarterly.
d. yearly.
The BLS produces data on

a. unemployment.
b. types of employment.
c. length of the average workweek.
d. All of the above are correct.
Which of the following is incorrect?

a. The Bureau of Labor Statistics gathers data on unemployment and employment.
b. The unemployment rates are computed according to number of unemployment
insurance claims filed.
c. Each adult included in the unemployment statistics is classified as employed,
unemployed, or not in the labor force.
d. Unemployment numbers include people aged sixteen and older.
Unemployment data is collected

a. from firms and unemployment insurance claims.
b. through a regular survey of about 6,000 households.
c. through a regular survey of about 60,000 households.
Which list includes all the categories into which the BLS divides the adult population?
a. employed or unemployed
b. discouraged workers, employed, or unemployed
c. employed, unemployed, or not in the labor force
d. discouraged workers, employed, or not in the labor force
Which of the following would be counted as unemployed according to official statistics?

a. Tim, who worked, but worked only 35 hours last week
b. Mary, who is waiting for her new job to start
c. Bev, who neither has a job nor is looking for one
d. None of the above would be counted as unemployed.
Which of the following would be counted as unemployed according to official statistics?

a. Gary, who has retired and is not looking for work
b. Brian, a full time student who is not looking for work
c. Nancy, who is on temporary layoff
Who would not be included in the labor force?

a. Mike, who has retired and is not looking for work
b. Jay, who is on temporary layoff
c. Jane, who does not have a job, but has applied for several in the last week
d. None of the above are included in the labor force.
Who would be included in the labor force?
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a.
b.
c.
d.
Bruce, a full-time student not looking for work

Holly, an unpaid homemaker
Dave, who does not have a job, but is looking for work
None of the above are included in the labor force.
Who would be included in the labor force?

a. Karen, who works most of the week in a steel factory
b. Beth, who is waiting for her new job at the bank to start
c. Dave, who does not have a job, but is looking for work
d. All of the above are included in the labor force.
Which of the following correctly ranks categories from largest to smallest according to
recent U.S. values?
a. employed, not in labor force, unemployed
b. employed, unemployed, not in labor force
c. not in labor force, employed, unemployed
d. not in labor force, unemployed, employed
To be counted as unemployed, a person must

a. be in the labor force.
b. be age 16 or older.
c. not be working.
A college student who is not working or looking for a job is counted as

a. unemployed and in the labor force.
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b.
c.
d.
unemployed, but not in the labor force.

employed and in the labor force.
neither employed nor part of the labor force.
Barb, a homemaker who works as a volunteer, is counted as

a. employed.
b. unemployed.
c. not in the labor force.
d. Both b and c are correct.
Don has graduated from college and is not working, but has taken a job that will start next
month. This week, Don is classified as
a. employed.
b. unemployed.
The BLS defines the unemployment rate as

a. the percentage of those unemployed relative to the percentage employed.
b. the percentage of the labor force that is unemployed.
c. the percentage of the adult population that is unemployed.
d. the amount of unemployment compensation paid per person, per week.
Which of the following equations is correct?

a. Labor force = number of employed.
b. Labor force = population - number of unemployed.
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c.
d.
Unemployment Rate = (number of unemployed adult population) x 100.

Unemployment Rate = (number of unemployed labor force) x 100.
The labor-force participation rate

a. equals 1 minus the unemployment rate.
b. measures the percentage of the total adult population that is in the labor force.
c. measures the percentage of the total adult population that is employed.
d. measures the percentage of the labor force that is employed.
The labor-force participation rate is defined as follows:

a. (Labor Force Adult Population) x 100.
b. (Adult Population Labor Force) x 100.
c. (Employed Adult Population) x 100.
d. (Employed Labor Force) x 100.
A few years ago, based on concepts similar to those used to estimate U.S. employment
figures, the Canadian adult noninstitutionalized population was 21.4 million, the labor
force was 14 million, and the number of people employed was 12.4 million. According to
these numbers, the Canadian labor-force participation rate and unemployment rate were
about
a. 81 percent and 7.5 percent.
b. 65 percent and 7.5 percent.
c. 65 percent and 11.4 percent.
d. 58 percent and 13 percent.
The BLS recently reported that there were 45.06 million people over age 16 who had at
least a bachelors degree. Of this number 36.21 million were in the labor force and 35.54
were employed. What was the labor-force participation rate and the unemployment rate
for this group?
a. about 98 percent and 1.49 percent
b. about 80 percent and 1.85 percent
c. about 79 percent and 1.89 percent
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d.
None of the above is correct.
Ceteris paribus, a.
the unemployment rate is unaffected, and the labor-force participation
rate increases.
b. the unemployment rate decreases, and the labor-force participation rate is unaffected.
c. the unemployment rate increases, and the labor-force participation rate decreases.
d. the unemployment rate increases, and the labor-force participation rate is unaffected.
Ceteris paribus, a.
the unemployment rate is unaffected, and the labor-force participation
rate increases.
b. the unemployment rate increases, and the labor-force participation rate decreases.
c. the unemployment rate increases, and the labor-force participation rate is unaffected.
d. the unemployment rate increases, and the labor-force participation rate increases.
.
Ann has just finished school and is looking for a job, but has not yet found one. As a
result,
a. the unemployment rate is unaffected, and the labor-force participation rate increases.
Jeff has just finished school, but has not yet begun to look for a job. As a result,
a. the unemployment rate is unaffected, and the labor-force participation rate is
unaffected
Which group has the highest labor-force participation rate?

a. black females
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b.
c.
d.
white females
white males
There are no significant differences in participation rates across these groups.
Among teenagers, which group has the highest unemployment rate?

a. black females
b. black males
c. white males
d. There are no significant differences in unemployment rates across these groups.
Which of the following correctly lists teenage groups in order of unemployment rates from
highest to lowest?
a. black females, white females, white males.
b. black females, white males, white females.
c. white males, black females, white females.
d. white males, white females, black females.
Which of the following is correct for people ages 20 and over?

a. Women have lower rates of labor-force participation and higher rates of
unemployment compared to those of men.
b. Women have lower rates of labor-force participation and similar unemployment rates
compared to those of men.
c. Men have lower rates of labor-force participation and similar unemployment rates
compared to women.
d. Men have lower rates of labor-force participation and higher rates of unemployment
than do women.
Which of the following is correct for people ages 20 and over?

a. Blacks have similar rates of labor-force participation and lower unemployment rates
than those of whites.
b. Blacks have similar rates of labor-force participation and higher unemployment rates
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c.
d.
Blacks have higher rates of labor-force participation and lower unemployment rates
Blacks have higher rates of labor-force participation and higher unemployment rates
Which of the following is correct?

a. Teenagers have higher labor-force participation rates and higher unemployment rates
than do adults.
b. Teenagers have higher labor-force participation rates and lower unemployment rates
than do adults.
c. Teenagers have lower labor-force participation rates and lower unemployment rates
than do adults.
d. Teenagers have lower labor-force participation rates and higher unemployment rates
than do adults.
The labor-force participation rate of the U.S. adult population (ages 16 and over) is about
a. 35 percent.
b. 50 percent.
c. 65 percent.
d. 80 percent.
The labor-force participation rate of U.S. teenagers (ages 16 to 19) is about

a. 35 percent.
b. 50 percent.
c. 65 percent.
d. 80 percent.
In the United States in recent years, the unemployment rate of blacks has been
a. less than that of whites.
b. about the same as that of whites.
c. about 50% higher than that of whites.
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d.
more than double that of whites.
In the United States in recent years, the unemployment rate among teenagers has been
a. less than that of people ages 20 and over.
b. about the same as that of people ages 20 and over.
c. about twice that of people ages 20 and over.
d. more than three times that of people ages 20 and over.
A rough estimate of the natural rate of unemployment is

a. 1.5 percent.
b. 3 percent.
c. 5.5 percent.
d. 7 percent.
Since World War II, the labor-force participation rate

a. has increased for both men and women.
b. has decreased for both men and women.
c. increased for women and decreased for men.
d. decreased for women and increased for men.
Just after World War II, the labor-force participation rate of women was
a. about 1/3 and currently is about 1/2.
b. about 1/3 and currently is about 3/5.
c. about 1/2 and currently is about 3/5.
d. about 3/5 and currently is about 1/2.
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Just after World War II, the labor-force participation rate of men was
a. about 3/5 and currently is about 3/4.
c. about 3/4 and currently is about 3/5.
The decrease in labor-force participation rates among U.S. men since World War II can be
attributed to
a. longer lives, laws that prevent mandatory retirement, and an increase in stay-at-home
dads.
b. better unemployment insurance, laws that prevent mandatory retirement, and laws
that prevent age discrimination in hiring.
c. easier job searches, better training, and laws that prevent mandatory retirement and
age discrimination in hiring.
d. longer schooling, an increase in stay-at-home dads, and earlier retirement and longer
lives.
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ceteris paribus, a.
the unemployment rate decreases.
b. the unemployment rate increases.
c. the size of the labor force falls.
d. Both a and c are correct.
.
Recent entrants account for about

a. 1/5 of those who are unemployed.
b. 1/4 of those who are unemployed.
c. 1/3 of those who are unemployed.
d. 1/2 of those who are unemployed.
Spells of unemployment end about

a. 1/5 of the time with the person leaving the labor force.
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b.
c.
d.
1/4 of the time with the person leaving the labor force.
Which of the following statements is correct?

a. Some people who are employed or who are not making serious effort to find work
will report themselves as unemployed.
b. Some people who want to find work will be counted as out of the labor force in the
official statistics.
c. Both a and b are correct.
Suppose that some people report themselves as unemployed when, in fact, they are
working in the underground economy. If these persons were counted as employed,
a. both the unemployment rate and labor-force participation rate would be higher.
b. both the unemployment rate and labor-force participation rate would be lower.
c. the unemployment rate would be higher and the labor-force participation rate would
be lower.
Suppose that some people are counted as unemployed when, in fact, to maintain
unemployment compensation they search for work at places where they are unlikely to be
hired. If these individuals were counted as out of the labor force instead of as
unemployed,
c. the unemployment rate would be lower and the labor-force participation rate would
be higher.
Some people are counted as out of the labor force because they make no serious effort to
look for work. However, some of these people may want to work even though they are too
discouraged to make serious effort to look for work. If these persons were counted as
unemployed instead of out of the labor force,
b. the unemployment rate would be higher and the labor-force participation rate would
be lower.
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c.
d.
the unemployment rate would be lower and the labor-force participation rate would
be higher.
Discouraged workers
a. are not counted either as part of the adult population nor as part of the labor force.
b. are counted as part of the adult population, but not as part of the labor force.
c. are counted as part of the adult population, and as unemployed.
d. None the above are correct.
The reported unemployment rate should be viewed as

a. clearly smaller than the true unemployment rate.
b. clearly larger than the true unemployment rate.
c. being very close to the true unemployment rate.
d. a useful but imperfect measure of joblessness.

a. There is no easy way to fix the unemployment rate as reported by the BLS to make it a
more reliable indicator of conditions in the labor market.
b. There are several easy ways economists have identified to fix the reported
unemployment rate to make it a more reliable indicator of conditions in the labor
market.
c. There is one easy way of fixing the unemployment rate as reported by the BLS to
make it a more reliable indicator of conditions in the labor market.
d. Economists have determined that the unemployment rate as reported by the BLS is a
perfectly reliable indicator of conditions in the labor market.

a. Short-term unemployment is a more serious problem than long-term unemployment.
b. Most spells of unemployment are short term.
c. Most unemployed persons have been unemployed a long time.
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d.
Most spells of unemployment are

a. short, but most unemployment observed at any given time is long term.
b. short, and most unemployment observed at any given time is short term.
c. long, and most unemployment observed at any given time is long term.
d. long, but most unemployment observed at any given time is short term.
Most of the economy's structural unemployment problem is attributable to

a. relatively few workers who are unemployed a short time.
b. relatively few workers who are unemployed a long time.
c. a large number of workers who are unemployed a short time.
d. a large number of workers who are unemployed a long time.
Which of the following is not a reason actual labor markets experience unemployment?
a. flexible wages
b. unions
c. job search
d. minimum-wage legislation
John is looking for work as a lawyer. He has turned down a couple of jobs to search for a
better match. Curtis is an out of work garbage collector. He would work for less than
what the jobs he applied for pay.
a. John and Curtis are both frictionally unemployed.
b. John and Curtis are both structurally unemployed.
c. John is frictionally unemployed and Curtis is structurally unemployed.
d. John is structurally unemployed and Curtis is frictionally unemployed.
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Christine is looking for work as a sports broadcaster. Although her prospects are good
she hasnt yet taken a job. Pam is looking for work in an automobile factory, but there
arent many job ads for automobile workers and every time she shows up for an interview,
there are many more people than openings.
a. Christine and Pam are both frictionally unemployed.
b. Christine and Pam are both structurally unemployed.
c. Christine is frictionally unemployed and Pam is structurally unemployed.
d. Christine is structurally unemployed and Pam is frictionally unemployed.
Nancy is searching for a job that suits her tastes about where to live and the people she
works with. Laura is looking for a job that makes the best use of her skills.
a. Nancy and Laura are both frictionally unemployed.
b. Nancy and Laura are both structurally unemployed.
c. Nancy is frictionally unemployed and Laura is structurally unemployed.
d. Nancy is structurally unemployed and Laura is frictionally unemployed.
The natural unemployment rate includes

a. both frictional and structural unemployment.
b. neither frictional nor structural unemployment.
c. structural, but not frictional unemployment.
d. frictional, but not structural unemployment.
Job search
a. explains why the firms pay higher than the competitive equilibrium wage.
b. is due to the failure of wages to balance labor supply and labor demand.
c. is the process of matching workers with appropriate jobs.
People who are unemployed because of job search are best classified as
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a.
b.
c.
d.
cyclically unemployed.
frictionally unemployed.
structurally unemployed.
discouraged workers.
Sectoral shifts in the economy

a. create structural unemployment.
b. immediately reduce unemployment.
c. increase unemployment due to job search.
d. on net leave unemployment unchanged.
Frictional unemployment can be the consequence of

a. workers leaving existing jobs to find ones they like better.
b. an industry declining while another is growing.
c. changes in the working conditions offered by competing firms.

a. Frictional unemployment is inevitable in a dynamic economy.
b. Although the unemployment created by sectoral shifts is unfortunate, in the long run
such changes lead to higher productivity and living standards.
c. About 1 percent of U.S. manufacturing jobs are destroyed each year.
d. In a typical month more than 3 percent of workers leave their jobs.
The government operates programs for job training and job information intended to
reduce unemployment.
a. Almost all economists agree that such programs are of no use.
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b.
c.
d.
Almost all economists agree that such programs work very well.
Some economists claim that the government can do these things no better than firms
and individuals could do them for themselves.
Unemployment insurance
a. protects workers from the financial hardship of being unemployed.
b. reduces job search unemployment.
c. decreases the natural rate of unemployment.
We would predict that the more generous unemployment compensation a country has,
a. the longer the duration of each spell of unemployment, and the higher the
unemployment rate.
b. the shorter the duration of each spell of unemployment, and the higher the
unemployment rate.
c. the longer the duration of each spell of unemployment, and the lower the
unemployment rate.
d. the shorter the duration of each spell of unemployment, and the lower the
unemployment rate.
A typical American worker covered by unemployment insurance receives

a. 100 percent of their former wages for 26 weeks.
b. 50 percent of their former wages for 26 weeks.
c. 25 percent of their former wages for 50 weeks.
Economists have found evidence that receiving unemployment-insurance benefits

a. decreases the job-search effort of the unemployed.
b. has no effect on the job-search effort of the unemployed.
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c.
d.
increases the job-search effort of the unemployed.

has an uncertain affect on the job-search effort of the unemployed.
Most economists agree that eliminating unemployment insurance would

a. increase unemployment because people would quit jobs they thought were not
secure.
b. increase unemployment because if the government didnt provide unemployment
insurance private firms would offer superior insurance.
c. reduce unemployment and so improve economic well-being.
d. reduce unemployment, but they disagree about whether economic well-being would
be enhanced by such a change.
An increase in the world price of oil would create a sectoral shift that would likely
a. increase unemployment, and the increase would be greater in a country with
unemployment insurance than in one without.
b. increase unemployment, but the increase would be smaller in a country with
c. decrease unemployment, and the decrease would be greater in a country with
d. decrease unemployment, but the decrease would be smaller in a country with
Minimum wages
a. have an important effect on the unemployment rates of certain groups.
b. are a predominant cause of unemployment in the economy.
c. affect all parts of the labor market equally.
d. do not cause unemployment.
An increase in the minimum wage would

a. increase both the quantity demanded and the quantity supplied of labor.
b. decrease both the quantity demanded and the quantity supplied of labor.
c. increase the quantity of labor demanded while decreasing the quantity supplied.
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d.
decrease the quantity of labor demanded while increasing the quantity supplied.
There will be structural unemployment if

a. some wages are kept above the equilibrium level.
b. some people choose not to work at the equilibrium wage.
c. some wages are below the equilibrium level.
d. All of the above could be correct; structural unemployment does not depend on the
wage rate.
Minimum wage laws

a. are the major cause of natural unemployment.
b. probably reduce teenage employment.
c. mainly affect skilled workers.
Which of the following would be associated with the type of unemployment created by the
minimum wage law?
a. Carrie quits her job as a history teacher because she would rather teach mathematics.
b. Bob pays his workers more than the equilibrium wage because he believes it makes
them more productive workers.
c. Jim decides to close his bicycle delivery service because he cannot afford to pay
workers the going wage.
d. In hopes of earning higher income Bruce goes back to trade school to get further
training.
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The following three questions are based on the figure below which shows the effect of a
minimum wage law.
The equilibrium wage and employment is

a. $7, and 60 workers.
b. $5, and 80 workers.
c. $3, and 100 workers
d. Any of the above could be correct.
Which of the following is incorrect? If a minimum wage started at $5 and

a. fell to $3, in this market there would be no affect on the unemployment rate.
b. remained there, in this market there would be 80 workers employed.
c. rose to $7, unemployment would rise by 20 workers.
d. rose to $7, there would be a surplus of workers.
If there were no minimum wage and then the government instituted a wage of $7, in this
market
a. employment would rise by 40.
b. employment would fall by 40.
c. unemployment would increase by 40.
d. there would be a surplus of 20.
Collective bargaining refers to

a. the process by which unions and firms agree on the terms of employment.
b. the process by which the government sets exemptions from the minimum wage law.
c. setting the same wage for all employees to prevent jealousy among workers.
d. setting the wage after discussion with employees in hopes of preventing unionization.
Between the 1940s and today, union membership

a. rose from about 1/6 to 1/3 of the labor force.
b. rose from about 1/3 to 1/2 of the labor force.
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c.
d.
fell from about 1/2 to 1/3 of the labor force.

fell from about 1/3 to 1/6 of the labor force.
In Sweden and Denmark, the percentage of the workers who belong to unions is
a. almost zero.
b. about the same as in the United States.
c. a bit greater than in the United States.
d. much greater than in the United States.

a. A union is a form of cartel.
b. The power of a union comes from its ability to strike if its demands are not met.
c. Union workers typically earn 20 to 30 percent more than similar nonunionized
workers.
d. Workers in unions reap the benefits of collective bargaining, while workers not in
unions bear some of the cost.
Union members typically earn

a. 0 to 5 percent more than similar workers who do not belong to a union.
b. 5 to 10 percent more than similar workers who do not belong to a union.
c. 10 to 20 percent more than similar workers who do not belong to a union.
d. 20 to 30 percent more than similar workers who do not belong to a union.
Effective collective bargaining will

a. increase the demand for union workers.
b. raise the wages of union workers.
c. raise the wages of nonunion workers.
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d.
All of the above are correct.
When a union bargains successfully with an employer, it

a. increases both the quantity of labor supplied and the quantity of labor demanded.
b. decreases both the quantity of labor supplied and the quantity of labor demanded.
c. increases the quantity of labor supplied and decreases the quantity of labor
demanded.
d. decreases the quantity of labor supplied and increases the quantity of labor
demanded.
When a union bargains successfully with an employer, it

a. increases unemployment and wages.
b. decreases unemployment and wages.
c. increases unemployment and decreases wages.
d. decreases unemployment and increases wages.
When unions raise wages in one sector of the economy, the supply of labor in other sectors
of the economy
a. increases, raising wages in industries that are not unionized.
b. increases, reducing wages in industries that are not unionized.
c. decreases, raising wages in industries that are not unionized.
d. decreases, reducing wages in industries that are not unionized.
The Wagner Act of 1935

a. prevents employers from interfering when workers try to organize a union.
b. prevents unions from acting as cartels.
c. prevents firms from hiring workers to permanently replace striking workers.
d. allows workers joining a unionized firm to choose not to join the union.
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The National Labor Relations Board

a. enforces antitrust laws against unions.
b. for a fee will act as a unions representative in collective bargaining.
c. enforces workers' rights to unionize.
Right-to-work laws
a. guarantee workers the right to form unions.
b. give workers in a unionized firm the right to choose whether or not to join the union.
c. prevent employers from hiring permanent replacements for workers who are on
strike.
In the absence of right-to-work laws, workers

a. would not be able to unionize.
b. would not be able to strike.
c. that went on strike could not be permanently replaced.
d. would have to join the union if they worked for a unionized firm.

a. Unions are bad for the economy as a whole.
b. Unions increase the level of employment in unionized firms.
c. Unions raise wages above the competitive equilibrium level.
d. Unions decrease the level of employment in nonunionized firms.
Unions
a. do not increase the natural rate of unemployment.
b. do not raise the wages of workers in the union.
c. reduce profits of firms.
d. cause wages of nonunionized workers to rise.
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. If U.S. antitrust laws were applied to unions,

ceteris paribus.ceteris paribus. c.
the natural rate of unemployment rate would not change.
d. the effect on the natural rate of unemployment rate is uncertain.
ceteris paribus.
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a. There is consensus among economists that unions are good for the economy.
b. There is consensus among economists that unions are bad for the economy.
c. There is consensus among economists that, on net, unions have almost no impact on
macroeconomic variables.
d. There is no consensus among economists about whether unions are good or bad for
the economy.
The theory of efficiency wages explains why

a. setting wages at the equilibrium level may increase unemployment.
b. it may be in the best interest of firms to offer wages that are above the equilibrium
level.
c. it may be in the best interest of firms to offer wages that are below the equilibrium
level.
d. it is efficient for firms to set wages at the equilibrium level.
According to the theory of efficiency wages, if Sarah, the CEO of a corporation that hires
nonunion labor, decides to increase what she pays workers above the competitive
equilibrium wage,
a. the profits of her firm may increase as a result.
b. the higher wages will induce her workers to shirk.
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c.
d.
.
the turnover of her workers may increase.

she will face a shortage of labor.
Becky, the CEO of a corporation operating in Ethiopia, decides to raise the wages of her
workers even though she faces an excess supply of labor. Her decision
a. might increase profits if it means that the wage is high enough for her workers to eat a
nutritious diet that makes them more productive.
b. will help eliminate the excess supply of labor if she raises it sufficiently.
c. though humanitarian, will certainly cause her profits to fall.
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a. Turnover means that firms occasionally fire workers to set an example for the other
workers.
b. Workers are less likely to quit jobs if the firm is paying a high wage.
c. Firms may find it profitable to pay wages above the equilibrium level in order to
reduce quits.
d. Paying high wages will create a surplus of workers.
Arnie is the owner of a firm that produces bottled water in Washington state. There are
many such firms in the area. Arnie decides that if he pays his workers a wage higher than
the going market wage, his profits will increase. Which of the following is a likely
explanation for his decision?
a. The higher the wage, the less often his workers will choose to leave his firm.
b. The higher the wage, the lower will be the cost of obtaining needed supplies.
c. The higher the wage, the more he can charge for his water.
d. All of the above are likely explanations for Arnie's decision.
Mary Sue is the newly appointed CEO of a company that manufactures clocks on an
assembly line. Her staff has told her that the output the firm produces given the number
of workers employed indicates some workers may be shirking. According to efficiency
wage theory, what should she do?
a. Reward those who shirk with higher wages.
b. Pay below the equilibrium wage rate to make up for the loss from shirking.
c. Make sure that workers are getting paid exactly the equilibrium wage rate.
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d.
Pay all workers more than the equilibrium wage rate.
Better management techniques of monitoring employee work effort would

a. increase real wages.
b. increase shirking.
c. increase labor-force participation rates.
d. reduce unemployment by reducing the need for efficiency wages.
Efficiency wages
a. reduce labor-force participation rates.
b. reduce the natural rate of unemployment.
c. reduce the incentive to shirk.
d. increase worker turnover.
An efficient wage
a. may decrease the cost of production.
b. requires increased turnover.
c. helps to reduce the level of unemployment.
According to the theory of efficiency wages, firms may pay

a. a wage above the competitive equilibrium level to reduce worker turnover.
b. a higher wage to improve the pool of workers they can hire from.
c. a high wage to provide an incentive to work hard.
103
104
105
106
Bill decides to hire some additional workers for his padlock factory. The equilibrium wage
is $12 per hour. Efficiency wage theory suggests that it is reasonable for Bill to offer
a. $12 per hour.
b. less than $12 per hour, since some people would be willing to work for less.
c. enough to attract the number of applicants necessary to fill the jobs available.
d. more than $12 per hour, so as to attract a better pool of applicants.
The worker quality variation of efficiency-wage theory suggests that if a firm pays a wage
higher than the equilibrium market wage,
a. it is guaranteed to hire only good-quality workers.
b. it increases the probability that the firm will hire good-quality workers.
c. it reduces the probability that the firm will hire good-quality workers.
Four employers have justified their actions as follows. Whose logic is inconsistent with the
logic of efficiency wage theory?
a. Kay pays her workers less than the equilibrium wage so they wont have the time or
money to look for work somewhere else.
b. Jay develops a new assembly line technology that limits the amount of shirking
workers may do, so he reduces what he pays his employees toward the equilibrium
wage.
c. Ray pays his workers in a developing country more than the going wage hoping that
they will get a better diet and so be more productive.
d. All of the above are inconsistent with the logic of efficiency wage theory.
Which list has a problem caused by moral hazard followed by a problem caused by
adverse selection?
a. Someone with auto insurance drives more recklessly; people avoid buying used cars.
b. People with average health problems are reluctant to buy health insurance because of
its cost; someone with auto insurance drives more recklessly.
c. A firm that pays low wages faces greater risk of hiring inept employees; people avoid
buying used cars
d. People with greater hidden health problems are more likely to buy health insurance; a
firm that pays low wages faces greater risk of hiring inept employees.
The worker quality variant of efficiency-wage theory
107
108
109
110
111
a.
b.
c.
d.
and the worker effort variant are both examples of moral hazard.
and the worker effort variant are both examples of adverse selection.
is an example of moral hazard, while the worker effort variant is an example of
adverse selection.
is an example of adverse selection, while the worker effort variant is an example of
moral hazard.
An efficient wage designed to promote worker effort is designed principally to reduce a

problem created by
a. moral hazard, but it also increases unemployment.
b. moral hazard, but it also decreases unemployment.
c. adverse selection, but it also increases unemployment.
d. adverse selection, but it also decreases unemployment.
An efficient wage designed to ensure that quality workers are hired is designed principally
to reduce a problem created by
b. moral hazard, but it also decreases unemployment.
d. adverse selection, but it also decreases unemployment.
Moral hazard arises when

a. the principal runs a risk that an agent will perform less than satisfactorily.
b. the principal is performing a task on behalf of an agent.
c. the agent cannot perfectly monitor the principal's behavior.
d. the principal fires an agent.
Which of the following is not an example of moral hazard?

a. A homeowner with fire insurance buys too few fire extinguishers.
112
113
114
115
b.
c.
d.
A babysitter has children watch more television than the parents prefer.
A person who knows they are likely to get ill buys health insurance.
All of the above are examples of moral hazard.
Henry Ford
a. was forced by a union to pay $5.00 per day.
b. paid $5.00 per day to improve worker nutrition.
c. believed that $5.00 a day would increase worker productivity.
d. paid $5.00 per day to illustrate he was a humanitarian.
Henry Ford called the $5-a-day wage

a. "one of the finest cost cutting moves we ever made."
b. "one of the worst decisions we ever made."
c. "the reason our company nearly went bankrupt."
d. "an expensive publicity stunt."
Which of the following causes of unemployment is not associated with an excess supply of
labor?
a. job search
b. minimum wage laws
c. unions
d. efficiency wages
Which of the following causes of unemployment is associated with a wage rate above the
market equilibrium level?
a. minimum wage laws
b. unions
116
117
118
119
c.
d.
efficiency wages
All of the above are correct.
Which of the following causes of unemployment is not associated with a wage rate above
the equilibrium level?
a. unions
b. job search
c. efficiency wages
d. minimum wage laws
Which of the following causes of unemployment would most likely be affected by more
accessible information about job opportunities?
a. collective bargaining
b. job search
c. minimum wage laws
d. efficiency wages
Which of the following tends to reduce the natural rate of unemployment?

a. unions
b. efficiency wages
c. job search
Which of the following explanations of the natural rate of unemployment is most

important for the U.S. economy?
a. job search
b. minimum wage laws
c. unions
d. Economists have not determined the answer to this question.
120
121
122
123
ANSWERS
1
~ANSWER:
c. the amount of unemployment that the economy normally experiences.
TYPE: M KEY1: D OBJECTIVE: 1 RANDOM: Y
2
~ANSWER:
b. year-to-year fluctuations of unemployment around its natural rate.
3
~ANSWER:
a. short-run ups and downs of the economy.
4
~ANSWER:
5
~ANSWER:
b. monthly.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
6
~ANSWER:
~ANSWER:
b. The unemployment rates are computed according to number of unemployment insurance claims filed.
8
~ANSWER:
c. through a regular survey of about 60,000 households.
9
~ANSWER:
c. employed, unemployed, or not in the labor force
10
~ANSWER:
b. Mary, who is waiting for her new job to start
11
~ANSWER:
c. Nancy, who is on temporary layoff
12
~ANSWER:
a. Mike, who has retired and is not looking for work
13
~ANSWER:
c. Dave, who does not have a job, but is looking for work
14
~ANSWER:
d. All of the above are included in the labor force.
15
~ANSWER:
a. employed, not in labor force, unemployed.
16
~ANSWER:
17
~ANSWER:
d. neither employed nor part of the labor force.
18
~ANSWER:
19
~ANSWER:
b. unemployed.
TYPE: M KEY1: C SECTION: 1 OBJECTIVE: 1 RANDOM: Y
20
~ANSWER:
b. the percentage of the labor force that is unemployed.
21
~ANSWER:
d. Unemployment Rate = (number of unemployed labor force) x 100.
22
~ANSWER:
b. measures the percentage of the adult population that is in the labor force.
23
~ANSWER:
a. (Labor Force Adult Population) x 100.
TYPE: M KEY1: E SECTION: 1 OBJECTIVE: 1 RANDOM: Y
24
~ANSWER:
c. 65 percent and 11.4 percent
25
~ANSWER:
b. about 80 percent and 1.85 percent.
26
~ANSWER:
TYPE: M DIFFICULTY: 3 KEY1: C SECTION: 1 OBJECTIVE: 1 RANDOM: Y
27
~ANSWER:
a. the unemployment rate is unaffected, and the labor-force participation rate is unaffected.
28
~ANSWER:
c. white males
29
~ANSWER:
b. black males
30
~ANSWER:
a. black females, white females, white males.
31
~ANSWER:
b. Women have lower rates of labor-force participation and similar unemployment rates compared to those of
men.
32
~ANSWER:
b. Blacks have similar rates of labor-force participation and higher unemployment rates than those of whites.
33
~ANSWER:
d. Teenagers have lower labor-force participation rates and higher unemployment rates than do adults.
34
~ANSWER:
c. 65 percent.
35
~ANSWER:
b. 50 percent.
36
~ANSWER:
d. more than double that of whites.
37
~ANSWER:
d. more than three times that of people ages 20 and over.
38
~ANSWER:
c. 5.5 percent.
39
~ANSWER:
c. increased for women and decreased for men.
40
~ANSWER:
TYPE: M DIFFICULTY: 3 KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
41
~ANSWER:
42
~ANSWER:
d. longer schooling, an increase in stay-at-home dads, and earlier retirement and longer lives.
43
~ANSWER:
c. 1/3 of those who are unemployed.
44
~ANSWER:
d. 1/2 of the time with the person leaving the labor force.
45
~ANSWER:
c. Both a and b are correct.
46
~ANSWER:
47
~ANSWER:
48
~ANSWER:
49
~ANSWER:
b. are counted as part of the adult population, but not as part of the labor force.
50
~ANSWER:
d. a useful but imperfect measure of joblessness.
51
~ANSWER:
a. There is no easy way to fix the unemployment rate as reported by the BLS to make it a more reliable
indicator of conditions in the labor market.
52
~ANSWER:
b. Most spells of unemployment are short term.
53
~ANSWER:
a. short, but most unemployment observed at any given time is long term.
54
~ANSWER:
b. relatively few workers who are unemployed a long time.
55
~ANSWER:
a. flexible wages.
56
~ANSWER:
c. John is frictionally unemployed and Curtis is structurally unemployed.
57
~ANSWER:
c. Christine is frictionally unemployed and Pam is structurally unemployed.

58
~ANSWER:
a. Nancy and Laura are both frictionally unemployed.
59
~ANSWER:
a. both frictional and structural unemployment.
60
~ANSWER:
c. is the process of matching workers with appropriate jobs.
61
~ANSWER:
b. frictionally unemployed.
62
~ANSWER:
c. increase unemployment due to job search.
63
~ANSWER:
64
~ANSWER:
c. About 1 percent of U.S. manufacturing jobs are destroyed each year.
65
~ANSWER:
c. Some economists claim that the government can do these things no better than firms and individuals could
do them for themselves.
66
~ANSWER:
a. protects workers from the financial hardship of being unemployed.
67
~ANSWER:
a. the longer the duration of each spell of unemployment, and the higher the unemployment rate.
68
~ANSWER:
b. 50 percent of their former wages for 26 weeks.
69
~ANSWER:
a. decreases the job-search effort of the unemployed.
70
~ANSWER:
d. reduce unemployment, but they disagree about whether economic well-being would be enhanced by such a
change.
71
~ANSWER:
a. increase unemployment, and the increase would be greater in a country with unemployment insurance than
in one without.
72
~ANSWER:
a. have an important effect on the unemployment rates of certain groups.
73
~ANSWER:
d. decrease the quantity of labor demanded while increasing the quantity supplied.
74
~ANSWER:
a. some wages are kept above the equilibrium level.
75
~ANSWER:
b. probably reduce teenage employment.
76
~ANSWER:
c. Jim decides to close his bicycle delivery service because he cannot afford to pay workers the going wage.
77
~ANSWER:
b. $5 and 80 workers.
TYPE: M KEY1: G SECTION: 2 OBJECTIVE: 2 GRAPH FORMAT: M QUESTION GRAPH: 1
INSTRUCTION: 1 RANDOM: Y
78
~ANSWER:
d. and rose to $7, there would be a surplus of workers.
TYPE: M DIFFICULTY: 3 KEY1: G SECTION: 2 OBJECTIVE: 2 GRAPH FORMAT: M QUESTION GRAPH: 1
79
~ANSWER:
c. unemployment would increase by 40.
TYPE: M DIFFICULTY: 3 KEY1: G SECTION: 2 OBJECTIVE: 2 GRAPH FORMAT: M QUESTION GRAPH: 1
80
~ANSWER:
a. the process by which unions and firms agree on the terms of employment.
81
~ANSWER:
d. fell from about 1/3 to 1/6 of the labor force.
82
~ANSWER:
d. much greater than in the United States.
83
~ANSWER:
c. Union workers typically earn 20 to 30 percent more than similar nonunionized workers.
84
~ANSWER:
c. 10 to 20 percent more than similar workers who do not belong to a union.
85
~ANSWER:
b. raise the wages of union workers.
86
~ANSWER:
c. increases the quantity of labor supplied and decreases the quantity of labor demanded.
87
~ANSWER:
a. increases unemployment and wages.
88
~ANSWER:
b. increases, reducing wages in industries that are not unionized.
89
~ANSWER:
a. prevents employers from interfering when workers try to organize a union.
90
~ANSWER:
c. enforces workers' rights to unionize.
91
~ANSWER:
b. give workers in a unionized firm the right to choose whether to join the union.
92
~ANSWER:
d. would have to join the union if they worked for a unionized firm.
93
~ANSWER:
c. Unions raise wages above the competitive equilibrium level.
94
~ANSWER:
c. reduce profits of firms.
95
~ANSWER:
b. the natural rate of unemployment rate would decrease, ceteris paribus.
96
~ANSWER:
d. There is no consensus among economists about whether unions are good or bad for the economy.
97
~ANSWER:
b. it may be in the best interest of firms to offer wages that are above the equilibrium level.
98
~ANSWER:
a. the profits of her firm may increase as a result.
99
~ANSWER:
a. might increase profits if it means that the wage is high enough for her workers to eat a nutritious diet that
makes them more productive.
100
~ANSWER:
a. Turnover means that firms occasionally fire workers to set an example for the other workers.
101
~ANSWER:
a. The higher the wage, the less often his workers will choose to leave his firm.
TYPE: M DIFFICULTY: 3 KEY1: C SECTION: 4 OBJECTIVE: 4 RANDOM: Y
102
~ANSWER:
d. Pay all workers more than the equilibrium wage rate.
103
~ANSWER:
d. reduce unemployment by reducing the need for efficiency wages.
104
~ANSWER:
c. reduce the incentive to shirk.
105
~ANSWER:
a. may decrease the cost of production.
106
~ANSWER:
107
~ANSWER:
d. more than $12 per hour, so as to attract a better pool of applicants.
108
~ANSWER:
b. it increases the probability that the firm will hire good-quality workers.
109
~ANSWER:
a. Kay pays her workers less than the equilibrium wage so they wont have the time or money to look for work
somewhere else.
110
~ANSWER:
a. Someone with auto insurance drives more recklessly; people avoid buying used cars.
111
~ANSWER:
d. is an example of adverse selection, while the worker effort variant is an example of moral
112
~ANSWER:
113
~ANSWER:
114
~ANSWER:
a. the principal runs a risk that an agent will perform less than satisfactorily.
115
~ANSWER:
c. A person who knows they are likely get ill buys health insurance.
116
~ANSWER:
c. believed that $5.00 a day would increase worker productivity
117
~ANSWER:
a. "one of the finest cost cutting moves we ever made."
118
~ANSWER:
a. job search
119
~ANSWER:
120
~ANSWER:
b. job search
121
~ANSWER:
b. job search
122
~ANSWER:
123
~ANSWER:
d. Economists have not determined the answer to this question.

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Unemployment and Its Natural Rate

The natural rate of unemployment is

Cyclical unemployment refers to

Cyclical unemployment is closely associated with

The natural rate of unemployment

None of the above are correct.

Data on unemployment is reported

The BLS produces data on

Which of the following is incorrect?

Unemployment data is collected

Which of the following would be counted as unemployed according to official statistics?

Which of the following would be counted as unemployed according to official statistics?

Who would not be included in the labor force?

Who would be included in the labor force?

Bruce, a full-time student not looking for work

Who would be included in the labor force?

To be counted as unemployed, a person must

A college student who is not working or looking for a job is counted as

unemployed, but not in the labor force.

Barb, a homemaker who works as a volunteer, is counted as

The BLS defines the unemployment rate as

Which of the following equations is correct?

Unemployment Rate = (number of unemployed adult population) x 100.

The labor-force participation rate

The labor-force participation rate is defined as follows:

None of the above is correct.

Which group has the highest labor-force participation rate?

Among teenagers, which group has the highest unemployment rate?

Which of the following is correct for people ages 20 and over?

Which of the following is correct for people ages 20 and over?

Which of the following is correct?

The labor-force participation rate of U.S. teenagers (ages 16 to 19) is about

more than double that of whites.

A rough estimate of the natural rate of unemployment is

Since World War II, the labor-force participation rate

Recent entrants account for about

Spells of unemployment end about

Which of the following statements is correct?

The reported unemployment rate should be viewed as

Which of the following is correct?

Which of the following is correct?

None of the above are correct.

Most spells of unemployment are

Most of the economy's structural unemployment problem is attributable to

The natural unemployment rate includes

Sectoral shifts in the economy

Frictional unemployment can be the consequence of

Which of the following is incorrect?

A typical American worker covered by unemployment insurance receives

Economists have found evidence that receiving unemployment-insurance benefits

increases the job-search effort of the unemployed.

Most economists agree that eliminating unemployment insurance would

An increase in the minimum wage would

There will be structural unemployment if

Minimum wage laws

The equilibrium wage and employment is

Which of the following is incorrect? If a minimum wage started at $5 and

Collective bargaining refers to

Between the 1940s and today, union membership

fell from about 1/2 to 1/3 of the labor force.

Which of the following is incorrect?

Union members typically earn

Effective collective bargaining will

All of the above are correct.