Exercise Problems: | ||
1. Government policies to stimulate an economy suffering a recession and designed to reduce unemployment in the short run are most likely directed towards reducing which type of unemployment? A. Cyclical B. Frictional C. Structural | Ans: A; cyclical unemployment occurs when there is not enough aggregate demand in the economy to provide jobs for everyone who wants to work. Here government stimulates economy in order to increase aggregate demand, and the unemployment drops. B is incorrect, frictional employment means people who are not working at the time of filling out the statistical survey because they just left one job and are about to start another job. Government policy cannot reduce this unemployment. C is incorrect, structural unemployment occurs when a labor market is unable to provide jobs for everyone who wants one because there is a mismatch between the skills of the unemployed workers and the skills needed for the available jobs. Increase of aggregate demand cannot reduce the employment. | |
2. Holding the working-age population constant, if the labor force participation ratio decline while the number of people employed remains unchanged, the unemployment rate will most likely: A. increase B. decrease C. remain unchanged | Ans: B; unemployment rate is the ratio of unemployed to labor force. Here labor force declines and unemployed remains the same, so the unemployment rate decreases. |
3. Which of the following types of unemployment is most likely to be associated with an economy in which many workers have been made obsolete by changing technology? A. cyclical B. frictional C. structural | Ans: C; structural unemployment occurs when a labor market is unable to provide jobs for everyone who wants one because there is a mismatch between the skills of the unemployed workers and the skills needed for the available jobs. Changing technology will cause the mismatch of skills. |
4. A. 2.38% B. 2.44% C. 6.00% | Ans: B; the formula of inflation rate is the ratio of CPI this year to last year minus one. So it is  |
5. An In a simple economy containing only two goods -- apples and shirts – the prices and quantities in the base period and current period are:
Assuming the base period consumer price index (CPI) = 100, the CPI for the current period is closest to: A. 103.57 B. 107.00 C. 113.75 | Ans: B; for base period, value of apples and shirts is  For current period, value of apples and shirts changes to  So price index in current period is  |
6. Consider the following information regarding consumer price index (CPI) numbers for this year and last year.
The inflation rate (in %) for the period is closest to: A. 2.35 B. 2.38 C. 2,41 | Ans: C; the formula of inflation rate is the ratio of CPI this year to last year minus one. So it is  |
7. Suppose the CPI basket contains only two goods and services: oranges and haircuts. In the base period, consumers bought 15 oranges at $2 each and 5 haircuts at $10 each. In the current period, consumers buy 15 oranges at $1.75 each and 5 haircuts at $12 each. The CPI for the current period is closest to: A. 107.81 B. 114.58 C. 117.97
| Ans: A; for base period, value of oranges and haircuts is  For current period, value of apples and shirts changes to  So price index in current period is  |
8. Suppose inflation increases due to increases in government spending and a reduction in taxes. Such inflation is best described as: A. Cost-push inflation B. Demand-pull inflation C. Monetarist cycle theory | Ans: B; demand-pull inflation means increasing demand raise prices generally, which then are reflected in a business’s costs as workers demand wage hikes to catch up with the rising cost of living. Here government spending will increase the total demand, and then cause inflation. A is incorrect; cost-push inflation means that rising cost compel businesses to raise price generally. Here cost does not change directly by the government spending. |
9. The most likely initial (short-run) effect of demand-pull inflation is an increase in: A. The price level and a decrease in real GDP B. The price level and an increase in real GDP C. Government expenditure followed by a decline in the quantity money | Ans:B; demand-pull inflation means increasing demand raise prices generally, which then are reflected in a business’s costs as workers demand wage hikes to catch up with the rising cost of living. So during the inflation, price level increases, and real GDP also increases since the rising demand. C is incorrect; during the inflation, the quantity of money will increase due to the rising demand. |
10. Which of the following will most likely lead to cost-push inflation? A. A decrease in the cost of financing B. An increase in the money prices of raw materials C. A technology change that lowers production cost | Ans: B; increasing in the price of raw material will increase the cost of production, which will lead to cost-push inflation. A and C both will lower the cost. |
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