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Macroeconomics, Second Canadian Edition (Hubbard)

Chapter 5 Unemployment and Inflation
5.1 Measuring the Unemployment Rate and the Labour Force Participation Rate
1) In November 2015 the Purchasing Managers' Index for Canadian manufacturers was 48.6 which
predicts a(n) ________ in the number of persons it employed and a(n) ________ in the total number of
persons unemployed in the economy.
A) decrease; increase
B) decrease; decrease
C) increase; decrease
D) increase; increase
Answer: A
Diff: 1 Page Ref: 105-106
Topic: The Unemployment Rate
2CE: Classic (1CE)- updated for 2CE
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how
they are computed
AACSB: Reflective Thinking
Special Feature: Chapter Opener: Canadian Manufacturers Grow While Others Shrink
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) Yes, the recession will ensure that I will never find a job as a programmer.
B) Yes, the recession will lower income in my field permanently.
1
Copyright © 2018 Pearson Canada, Inc.
C) No, the recession will most likely be short-lived and I can get a job after it is over.
D) No, the recession will have no impact on my ability to get a job or my future income.
E) Yes, the recession will likely reduce the demand for computer science majors permanently.
Answer: C
Diff: 2 Page Ref: 106
Topic: How Long Are People Typically Unemployed?
they are computed
Special Feature: Economics in Your Life: Should You Change Your Career Plans If You Graduate During a
Recession?
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) it is more likely that an incumbent Prime Minister will be re-elected.
B) that stock prices are more likely to fall.
C) that jobs are less difficult to find.
D) that investors will be more optimistic about the economy.
E) consumer spending is likely to rise.
Answer: B
they are computed
4) Statistics Canada would categorize a person as ________ if they were temporarily away from their job
because they were ill.
A) employed
B) unemployed
C) a discouraged worker
D) out of the labour force
E) disabled
Answer: A
Topic: The Labour Force Survey
they are computed
5) Statistics Canada would categorize a retiree who is not working as

A) employed.
B) unemployed.
C) a discouraged worker.
D) out of the labour force.
E) not eligible to work in Canada.
Answer: D
they are computed
2
6) The labour force equals the number of people

A) employed.
B) unemployed.
C) employed plus unemployed.
D) in the working-age population.
E) in the entire country.
Answer: C
they are computed
3
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 measured labour force participation rate.
C) decrease the number of persons in the labour force.
D) decrease the number of persons in the working-age population.
E) increase the number of people eligible to work in Canada.
Answer: B
Topic: Labour Force Participation
they are computed
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) (100/1,000) × 100 percent.
B) (100/1,100) × 100 percent.
C) (100/15,000) × 100 percent.
D) (100/20,000) × 100 percent.
E) (1000/15,000) × 100 percent.
Answer: B
they are computed
AACSB: Analytic Skills
9) Refer to Table 5.1. The labour force participation rate for this simple economy equals
A) (1,000/1,100) × 100 percent.
B) (1,000/15,000) × 100 percent.
C) (1,100/15,000) × 100 percent.
D) (1,100/20,000) × 100 percent.
E) (15,000/20,000) × 100 percent.
Answer: C
they are computed
4
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) (20/60) × 100%.
B) (20/80) × 100%.
C) (30/80) × 100%.
D) (20/100) × 100%.
E) (60/90) × 100%.
Answer: D
they are computed
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) increase.
B) decrease.
C) remain constant.
D) not change in a way that can be predicted.
Answer: C
they are computed
12) The unemployment rate equals the number of unemployed divided by the ________, all times 100.
A) number of employed
B) labour force
C) working-age population
D) total population
E) discouraged workers
Answer: B
they are computed
5
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 unemployment rate to decrease.
B) the labour force participation rate to decrease.
C) the number of discouraged workers to increase.
D) no change in the unemployment rate.
E) the employment population ratio to increase.
Answer: B
they are computed
14) Someone who is available for work but has not actively looked for work in the previous four weeks
would be classified as
A) employed.
B) unemployed.
C) not in the labour force.
D) not in the working-age population.
E) not legally entitled to work.
Answer: C
they are computed
15) The labour force participation rate equals the

A) (number of employed divided by the labour force) × 100.
B) (labour force divided by the number of people not in the labour force) × 100.
C) (labour force divided by working-age population) × 100.
D) (labour force divided by the total population) × 100.
E) (working age population divided by employment) × 100.
Answer: C
they are computed
6
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) unemployment rate
B) discouraged-worker ratio
C) labour force participation rate
D) the ratio of minimum wage to inflation
E) the employment population ratio
Answer: C
they are computed
17) Which of the following cause the unemployment rate as measured by Statistics Canada to
understate the true extent of joblessness?
A) inflation
B) discouraged workers
C) people employed in the underground economy
D) unemployed persons falsely report themselves to be actively looking for a job
E) a shrinking working age population
Answer: B
Topic: Problems with Measuring the Unemployment Rate
they are computed
18) Which of the following cause the unemployment rate as measured by Statistics Canada to overstate
the true extent of joblessness?
A) inflation
B) discouraged workers
C) counting people as employed who are working part time, although they would prefer to be working
full time
D) unemployed persons falsely report themselves to be actively looking for a job
E) people choosing not to participate in the labour force
Answer: D
they are computed
7
19) Which of the following explains the changes in the Canadian adult male labour force participation
rate since 1976?
A) More men are joining the military as compared to the past.
B) More men are retiring later in life as compared to the past.
C) Fewer men consider themselves discouraged workers as compared to the past.
D) Younger men are remaining in school longer as compared to the past.
E) There are fewer working age males than in the past.
Answer: D
they are computed
20) In November 2015, Canada saw an increase of ________ jobs for the same time the previous year.
A) 183,000
B) 124,000
C) 21,500
D) 3.1 percent
E) 5.1 percent
Answer: B
they are computed
21) The recession that followed the global financial crisis of 2007-2009 caused ________ in Canada.
A) less unemployment
B) a rise in the labour force participation rate
C) an increase in the duration a typical unemployed person was out of work
D) less government spending
E) a drop in the working age population
Answer: C
2CE: New to 2CE
they are computed
8
22) From 1981 until 2014 , the labour force participation rate for adult men has ________ and for adult
women has ________.
A) increased; increased
B) increased; decreased
C) decreased; increased
D) decreased; decreased
Answer: C
they are computed
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) increase
B) more than double
C) decrease
D) barely change
E) fall by half
Answer: A
they are computed
24) In the modern Canadian economy, the typical unemployed person stays unemployed for
A) a relatively long time, over a year.
B) a relatively short time, less than 13 weeks.
C) a long time during expansions and short time during recessions.
D) an amount of time that is hard to quantify.
E) a moderately long time, more than 26 weeks.
Answer: B
they are computed
9
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) they verify claims that people have actively looked for work.
C) they tend to count unemployed people more often because they are not working.
D) 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.
E) people who choose not to work are counted as unemployed.
Answer: A
Topic: Labour Force Survey
they are computed
26) The most important group not identified by the unemployment rate is
A) seniors.
B) discouraged workers.
C) part-time workers seeking full-time work.
D) those under the minimum working age.
E) students.
Answer: B
they are computed
27) Which of the following statements is true about the Canadian economy?
A) Each year, many new jobs are created, but few existing jobs are destroyed, and the unemployed find
jobs quickly.
B) Each year, few new jobs are created, but few existing jobs are destroyed, keeping unemployment low.
C) Each year, many new jobs are created and many existing jobs are destroyed.
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 more jobs are destroyed than are created.
Answer: C
Topic: Job Creation and Job Destruction
they are computed
28) Counting part-time workers who are looking for full-time work as employed overstates the degree
of joblessness in the economy.
Answer: FALSE
they are computed
10
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
they are computed
30) The labour force participation rates of women have rapidly increased since 1976.
Answer: TRUE
they are computed
11
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
Labour force
Unemployment rate = × 100.
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 participation rate = × 100.
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
they are computed
12
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
Labour force
Labour force
Answer:
Working-age
population 235,900
Employment 139,991
Unemployment 14,524
Labour force
Labour force participation rate = × 100.
Labour force = (Working-age population × Labour force participation rate)/100

Labour force = (235,900 × 65.5)/100 = 154,515
Unemployment rate = × 100.
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
they are computed
13
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.
they are computed
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.
they are computed
35) The labour force is the sum of

A) employed workers and discouraged workers.
B) employed workers and unemployed workers.
C) employed workers and individuals not looking for work.
D) employed workers and the working age population.
E) unemployed workers and the working age population.
Answer: B
2CE: 1CE
Learning Outcome: Macro 14: Identify different types and measures of unemployment and discuss its causes
14
36) In November 2015, the Purchasing Managers' Index (PMI) for Canada 's manufacturing sector was
48.6 while the PMI for Germany was 52.9. Based solely on this data, we would expect
A) employment to rise in both regions.
B) employment to fall in both regions.
C) employment to remain stable in Canada and fall in Germany.
D) employment to fall in Canada and remain stable in Germany.
E) employment to fall in Canada and rise in Germany.
Answer: E
Special Feature: Chapter Opener: Canadian Manufacturers Grow While Others Shrink
37) 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) the cost of additional education is always higher during recession.
B) high unemployment rates do not usually last for very long.
C) looking for work is your only option.
D) the wages of university graduates do not fall during recession.
E) recessions typically last longer than it takes to complete a second university degree.
Answer: B
Topic: Government Policies
2CE: 1CE
Special Feature: Economics in Your Life: Should You Change Your Career Plans If You Graduate During a
Recession?
38) The unemployment rate is

A) the percentage of the labour force that is employed.
B) the percentage of the working-age population that is unemployed.
C) the percentage of the labour force that is unemployed.
D) the percentage of the working-age population that is employed.
E) the percentage of the population that is unemployed.
Answer: C
2CE: 1CE
15
39) A full-time student who is not working is categorized as
A) unemployed.
B) employed.
C) not in the labour force.
D) a discouraged worker.
E) frictionally unemployed.
Answer: C
2CE: 1CE
40) Discouraged workers are classified by Statistics Canada as

A) part of the labour force.
B) out of the labour force.
C) unemployed.
D) employed.
E) part-time employees.
Answer: B
2CE: 1CE
41) Discouraged workers are

A) workers who have a part time job but want a full time job.
B) workers who find their current jobs unfulfilling and are considering a job change.
C) workers who have consistently been looking for work for more than 4 weeks.
D) workers who have stopped looking for work because they believe there are no jobs for them.
E) workers who are disappointed in the labour force because they are over qualified for their current
jobs.
Answer: D
2CE: 1CE
16
42) The labour force participation rate is defined as
A) the percentage of the working-age population that is employed.
B) the percentage of the working-age population that is unemployed.
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 working-age population in the labour force.
Answer: E
2CE: 1CE
43) 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 unemployment rate increased.
B) the labour force participation rate decreased.
C) the unemployment rate decreased.
D) the working-age population increased.
E) the employment population ratio has decreased.
Answer: A
2CE: 1CE
44) During the month of May, 300,000 workers moved from being classified as "unemployed" to being
classified as "employed." As a result,
A) the unemployment rate rose.
B) the labour force participation rate fell.
C) the unemployment rate fell.
D) the labour force participation rate rose.
E) the employment population ratio fell.
Answer: C
2CE: 1CE
17
45) 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) an increase in the unemployment rate
C) a decrease in the unemployment rate
D) an increase in the working-age population
E) an increase in minimum working age
Answer: D
2CE: 1CE
46) 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) unemployed.
B) out of the labour force.
C) a discouraged worker.
D) an involuntary part-time worker.
E) all of the above
Answer: A
2CE: 1CE
47) Which of the following causes the unemployment rate to understate the true extent of joblessness?
A) Many full-time workers really want to be part-time workers.
B) Persons who collect unemployment benefits report themselves to be searching for a job.
C) Discouraged workers are not counted as unemployed.
D) A drug dealer reports herself as unemployed.
E) Some people do not want to have a paid job.
Answer: C
2CE: 1CE
18
48) An increase in the size of the underground economy would
A) have no effect on the official unemployment rate.
B) cause the official unemployment rate to fall as more people find jobs outside the formal economy.
C) cause the labour force participation rate to rise.
D) cause the labour force participation rate to fall.
E) raise the employment population ratio as reported by Statistics Canada.
Answer: D
2CE: 1CE
49) 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) not in the labour force.
B) unemployment.
C) employed part time.
D) employed full time.
E) not legally entitled to work in Canada.
Answer: A
2CE: New to 2CE
they are computed
50) After the legalization of recreational marijuana, the labour force participation rate would
A) rise.
B) fall.
C) remain unchanged.
D) rise then fall.
E) fall then rise.
Answer: A
2CE: New to 2CE
they are computed
19
51) 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
2CE: 1CE
52) 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
2CE: 1CE
53) 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
2CE: 1CE
20
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
2CE: 1CE
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
2CE: 1CE
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
2CE: 1CE
21
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 million
D) 48.1 million
E) 50 million
Answer: C
2CE: 1CE
58) Which of the following describes actual trends in the Canadian labour force participation rate?
A) The labour force participation rate of adult men has risen since 1975.
B) The labour force participation rate of adult women has fallen since 1975.
C) The labour force participation rate of adult men not in school, but too young to retire has risen since
1975.
D) The labour force participation rate of adult women has risen since 1975.
E) The labour force participation rate of all adults has fallen since 1975.
Answer: D
2CE: 1CE
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 increase the unemployment rate and reduce the labour
force participation rate.
B) Including members of the military would reduce the unemployment rate and increase the labour
force participation rate.
C) Including the military would increase both the unemployment rate and the labour force participation
rate.
D) Including the military would reduce both the unemployment rate and the labour force participation
rate.
Answer: B
2CE: 1CE
22
60) In 2010, after the 2008-2009 recession, 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
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 unemployment rate increased.
C) The labour force participation rate decreased.
D) The unemployment rate decreased.
E) The employment population ratio decreased.
Answer: D
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 increased.
B) the unemployment rate decreased.
C) the labour force participation rate increased.
D) the employment population ratio has increased.
E) neither the unemployment rate nor the labour force participation rate changed.
Answer: E
2CE: 1CE
23
63) For the last few decades, the labour force participation rates of men have ________, and the labour
force participation rates of women have ________.
A) risen; risen
B) fallen; fallen
C) risen; fallen
D) fallen; risen
Answer: D
2CE: 1CE
64) The labour force survey asks adults about their employment status and is used to compile the
monthly unemployment rate.
Answer: TRUE
2CE: 1CE
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: FALSE
2CE: 1CE
66) In the labour force survey, all people are categorized as either employed or unemployed.
Answer: FALSE
2CE: 1CE
67) The labour force participation rates of men have gradually increased since 1975.
Answer: FALSE
2CE: 1CE
24
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.
2CE: 1CE
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:
× 100
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:
× 100
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.
2CE: 1CE
25
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:
× 100
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:
× 100
which equals 10%.

2CE: 1CE
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:
× 100
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:
× 100
which equals 80%.

2CE: 1CE
26
5.2 Types of Unemployment
1) 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 ups and downs in inflation.
D) a slowdown in the economy.
E) the changing of the seasons.
Answer: B
Topic: Types of Unemployment
Learning Outcome: 5.2 Identify the four types of unemployment
2) 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) cyclical unemployment
D) seasonal unemployment
E) geographical unemployment
Answer: A
3) A student who just graduated from college but has not found a job would most likely be
A) frictionally unemployed.
B) structurally unemployed.
C) cyclically unemployed.
D) seasonally unemployed.
E) under employed.
Answer: A
27
4) Cyclical unemployment is the result of
jobs.
E) regional differences in the economy.
Answer: D
5) Structural unemployment is the result of

jobs.
E) the entry of new workers into the labour force.
Answer: A
6) 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) frictionally unemployed.
C) seasonally unemployed.
D) cyclically unemployed.
E) permanently unemployed.
Answer: A
2CE: New to 2CE
Special Feature: Making the Connection: How Should We Categorize the Unemployment of Laid-off CHCH TV
Employees?
28
7) According to the text, economists consider full employment to occur when
A) everyone who wants a job has a job.
B) frictional unemployment equals zero.
C) the sum of frictional unemployment and structural unemployment equals zero.
D) the unemployment rate consists of only frictional and structural unemployment.
E) structural unemployment is less than 2 percent.
Answer: D
Topic: Full Employment
8) If cyclical unemployment is eliminated in the economy, then

A) the economy is considered to be at full employment.
B) the unemployment rate is below the natural rate of unemployment.
C) the unemployment rate is above the natural rate of unemployment.
D) the economy is at less than full employment.
E) the unemployment rate will be zero.
Answer: A
9) Full employment is not considered to be zero unemployment, because

A) some cyclical unemployment always exists.
B) some people do not want a job.
C) there are not enough jobs for everyone who wants one.
D) people do not find jobs instantaneously.
E) not everyone is entitled to work in Canada.
Answer: D
10) The natural rate of unemployment is the amount of unemployment

A) equal to frictional and cyclical unemployment.
B) equal to frictional plus structural unemployment.
C) that exists when the economy goes into recession.
D) that exists when the economy is in an expansion.
E) equal to seasonal and cyclical unemployment.
Answer: B
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11) During the recession of 2008-2009, cyclical unemployment increased as the recession continued. This
increase in cyclical unemployment
A) increased the natural rate of unemployment.
B) decreased the natural rate of unemployment.
C) had no effect on the natural rate of unemployment.
D) could have increased or decreased the natural rate of unemployment.
Answer: C
12) 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 classed as
B) seasonally unemployed.
C) frictionally unemployed.
E) naturally unemployed.
Answer: A
2CE: New to 2CE
13) 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) cyclically unemployed.
D) frictionally unemployed.
E) under employed.
Answer: A
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30
14) 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
B) cyclically unemployed.
C) structurally unemployed.
E) legally unemployed.
Answer: C
15) If you have trouble finding a job because of a slowdown in the overall economy, we would say that
you are
C) cyclically unemployed.
E) naturally unemployed.
Answer: C
16) The advice to "retrain" would be most appropriate for which of the following types of
unemployment?
A) frictional unemployment
B) structural unemployment
C) cyclical unemployment
D) core unemployment
E) seasonal unemployment
Answer: B
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17) If the federal government implements programs so that the unemployed are more quickly matched
with jobs, then
A) the natural rate of unemployment will increase.
B) the natural rate of unemployment will decrease.
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: B
18) Eliminating frictional unemployment would be good for the economy.

Answer: FALSE
19) Unemployment caused by a business cycle recession is called cyclical unemployment.

Answer: TRUE
20) The natural rate of unemployment consists of frictional unemployment plus structural
unemployment.
Answer: TRUE
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21) 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.
22) 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.
33
23) 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.
24) 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
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25) Unemployment arising from a persistent mismatch between the skills and characteristics of workers
and the requirements of jobs is called
Answer: B
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34
26) Workers laid off as a result of a recession suffer
E) natural unemployment.
Answer: C
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27) 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
Answer: B
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28) Which of the following is an example of a worker experiencing cyclical unemployment?

A) a worker who changes jobs to move closer her family
B) an assembly-line worker who loses his job because of automation
C) a Canadian Pacific Railway employee who got laid off because of the recession of 2008-2009
D) a lifeguard who was hired during the summer season is laid off after summer is over
E) a worker who quits his job because he does not get along with his boss
Answer: C
2CE: 1CE
35
29) 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) cyclical
C) frictional
D) structural
E) seasonal unemployment
Answer: C
2CE: 1CE
30) Sarah is a full-time student who is not looking for work. What kind of unemployment is Sarah
experiencing?
A) cyclical
B) structural
C) frictional
D) seasonal
E) Sarah is not experiencing unemployment of any kind because she is not currently part of the labour
force.
Answer: E
2CE: 1CE
31) 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) structural.
B) cyclical.
C) seasonal.
D) functional.
E) involuntary part-time employment.
Answer: C
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36
32) Which of the following is an example of a worker experiencing frictional unemployment?
A) a worker who quits his job at the post office to find more interesting work
B) a computer programmer who loses her job because it is outsourced to India
C) an employee who is laid off because the economy is suffering a recession
D) an Air Canada pilot who loses her job because of lack of demand for air travel
E) a road worker laid off in the winter
Answer: A
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33) 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 ski lift operator who loses his job when the snow melts in the spring.
E) a mother who quits her job to stay home with her children.
Answer: D
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34) What are the three main kinds of unemployment?

A) frictional, seasonal, and cyclical
B) temporary, permanent, and volunteer
C) cyclical, structural, and temporary
D) structural, frictional, and cyclical
E) involuntary part-time, structural, and seasonal
Answer: D
2CE: 1CE
35) When the labour market is at full employment

A) there is only cyclical unemployment in the economy.
B) there is only structural unemployment in the economy.
C) the unemployment rate is 0%.
D) there is no cyclical unemployment in the economy.
E) frictional unemployment is less than 2%
Answer: D
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37
36) When an economy is at its natural rate of unemployment, which of the following will be true?
A) The unemployment rate will be 0%.
B) The labour force participation rate will be 100%.
C) The unemployment rate will be greater than 0%.
D) The employment population ratio will be 80%.
E) Only structural unemployment as a result of technological change will exist in the economy.
Answer: C
2CE: 1CE
37) The natural rate of unemployment is made up of

A) frictional, cyclical, and structural unemployment.
B) frictional and cyclical unemployment.
C) cyclical and structural unemployment.
D) frictional and structural unemployment.
E) seasonal and structural unemployment.
Answer: D
2CE: 1CE
38) An increase in cyclical unemployment will result in

A) an increase in the natural rate of unemployment.
B) an increase in the unemployment rate.
C) an increase in structural unemployment.
D) a decrease in frictional unemployment.
E) an increase in the employment population ratio.
Answer: B
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38
39) We say that the economy is at full employment if the unemployment rate is equal to
A) zero.
B) the natural rate of unemployment.
C) the amount of cyclical unemployment.
D) the sum of frictional and cyclical unemployment.
E) the sum of structural and cyclical unemployment.
Answer: B
2CE: 1CE
40) In December 2015, CHCH TV laid-off 129 employees from its local news division. If these lay-offs
occured because advertisers cut back their spending due to a slow down in the economy, the former
local news division workers would be classed as
B) frictionally unemployed.
E) not in the labour force.
Answer: D
Special Feature: Making the Connection: How Should We Categorize the Unemployment of Laid-off CHCH TV
Employees?
41) The natural rate of unemployment consists of frictional unemployment plus cyclical unemployment.
Answer: FALSE
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42) Eliminating all structural unemployment would be good for the economy.
Answer: FALSE
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39
43) The full-employment rate of unemployment is zero.
Answer: FALSE
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44) 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.
2CE: 1CE
45) 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.
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46) 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.
2CE: 1CE
40
5.3 Explaining Unemployment
1) An increase in Employment Insurance payments would, in effect, ________ the amount of time spent
searching for a job, which would increase ________ unemployment.
A) increase; cyclical
B) increase; frictional
C) decrease; cyclical
D) decrease; frictional
E) increase; structural
Answer: B
Learning Outcome: 5.3 Explain what factors determine the unemployment rate
2) Which of the following would increase the unemployment rate?

A) a law making it illegal to work more than 35 hours per week
B) a cut in employment compensation
C) an increase in employment insurance payments
D) a decrease in the minimum wage
E) a period of high economic growth
Answer: C
3) Which of the following would decrease the unemployment rate?

A) an increase in the minimum wage
B) an increase in the efficiency wage
C) an increase in labour union membership
D) government aid to retrain unemployed workers
E) an increase in the generousity of Employment Insurance payments
Answer: D
4) Which of the following policies would reduce structural unemployment?

A) an increase in the minimum wage
B) a job retraining program
C) expanding employment insurance to cover more workers
D) building an online job database that helps workers find jobs
E) a government spending program designed to shorten recessions
Answer: B
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5) Which of the following policies would reduce frictional unemployment?
A) a decrease in the minimum wage
B) a job retraining program
C) implementing an unemployment insurance policy
D) building an online job database that helps workers find jobs
E) an increase in the generousity of Employment Insurance payments
Answer: D
6) The Employment Insurance program has which of the following effects?

A) It decreases the amount of personal income of the unemployed.
B) It contributes to the severity of a recession or economic downturn.
C) It increases the amount of time spent searching for a job.
D) It lowers the overall unemployment rate.
E) It reduces structural unemployment.
Answer: C
7) 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) lower; lower
B) lower; increase
C) increase; lower
D) increase; increase
E) increase; not impact
Answer: B
8) The increased generosity of unemployment insurance programs in Canada as compared to the

United States should
A) decrease the duration of unemployment in Canada as compared to the United States.
B) increase the duration of unemployment in Canada as compared to the United States.
C) have no impact on the duration of unemployment in Canada.
D) raise the duration of unemployment in the United States.
E) raise Canada's structural unemployment relative to the United States.
Answer: B
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9) If the minimum wage is set above the market wage,
A) the quantity of labour supplied will be below the quantity of labour demanded.
B) unemployment will rise.
C) highly-skilled workers will have a harder time finding jobs.
D) frictional unemployment will increase.
E) All of the above are correct.
Answer: B
10) Minimum wage laws cause unemployment because the legal minimum wage is set
A) below the market wage, causing labour demand to be greater than labour supply.
B) below the market wage, causing labour demand to be less than labour supply.
C) above the market wage, causing labour demand to be greater than labour supply.
D) above the market wage, causing labour demand to be less than labour supply.
E) too low.
Answer: D
11) In September 2016, the government of Alberta announced that it would raise the minimum in the
province from $11.20 an hour to $15 an hour in 2018. Which of the following is most likely to occur as a
result of the new minimum wage?
A) an increase in unemployment
B) a decrease in prices
C) a decrease in unemployment
D) a decrease in automation
E) an increase in the employment population ratio
Answer: A
2CE: New to 2CE
43
12) Suppose more Canadian retail firms decided to pay efficiency wages. As a result, we would expect
A) the labour force participation rate to fall.
B) the average wage rate to rise.
C) the average wage to fall.
D) long run unemployment trends to reverse.
E) the employment population ratio to rise.
Answer: B
Topic: Labour Unions
Special Feature: Making the Connection: Why Does Costco Pay Its Workers More than Walmart?
13) If firms pay what are called "efficiency wages," they pay wages that
A) motivate workers to increase their productivity.
B) are lower than average to ensure maximum profit.
C) will eventually lower the unemployment rate.
D) are mandated by the government.
E) negotiated by labour unions.
Answer: A
Topic: Efficiency Wages
14) Efficiency wages cause unemployment because

A) firms pay wages that are below the market wage, causing the quantity of labour demanded to be
greater than the quantity of labour supplied.
B) firms pay wages that are below the market wage, causing the quantity of labour demanded to be less
than the quantity of labour supplied.
C) firms pay wages that are above the market wage, causing the quantity of labour demanded to be
greater than the quantity of labour supplied.
D) firms pay wages that are above the market wage, causing the quantity of labour demanded to be less
than the quantity of labour supplied.
E) firms pay wages that are above the market wage, causing the quantity of labour demanded to
increase in all industries.
Answer: D
15) 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
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16) Most economists believe that labour unions significantly increase the overall unemployment rate in
Canada.
Answer: FALSE
17) Efficiency wage is another name for the minimum wage.

Answer: FALSE
18) 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.
19) 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.
45
20) The Employment Insurance program
A) increases the amount of time the unemployed spend searching for a job.
B) decreases the level of frictional unemployment.
C) pays the unemployed a benefit equal to twice the average wage.
D) eliminates structural unemployment.
E) increases cyclical unemployment.
Answer: A
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21) By offering training to workers whose firms laid them off because of competition from foreign firms,
the federal government is attempting to reduce
Answer: B
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22) Establishing a federal employment agency that speeds up the process of matching unemployed
workers with unfilled jobs is an attempt to lower
Answer: A
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46
23) Which of the following explains why Canada tends to have unemployment rates that are higher
than the United States?
A) Technological change occurs at a faster rate in Canada, so structural unemployment is higher in
Canada.
B) Canada offers more generous unemployment benefits than the United States.
C) Firms in Canada offer employees higher wages and higher benefits than do firms in the United
States.
D) The minimum wage in Canada is lower than it is in the United States.
E) Seasons play a bigger role in the Canadian economy than in the American economy.
Answer: B
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24) Despite increasing the unemployment rate, the Employment Insurance program can improve the
economy by
A) keeping unmotivated people out of the labour force.
B) allowing workers the time needed to find a job that is a good match for their skills.
C) increasing the need for government.
D) creating an incentive for workers to put a lot of effort into their jobs.
E) creating an incentive for firms to hire more workers.
Answer: B
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25) 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) the average duration of unemployment is longer in the United States than in Canada.
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) frictional unemployment is higher, on average, in the United States than in Canada.
E) cyclical unemployment is higher, on average in Canada than in the United States.
Answer: B
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AACSB: Multicultural and Diversity
47
26) Which of the following has a tendency to raise the unemployment rate?
A) implementing a minimum wage in an economy
B) reducing unemployment insurance in an economy
C) offering wages at the market-clearing rate
D) reducing labour unions' membership in an economy
E) introducing programs that retrain workers displaced by technological change
Answer: A
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27) 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 productivity.
C) is higher than the market wage and tends to decrease productivity.
D) is lower than the market wage and tends to decrease productivity.
E) is lower than the market wage and tends to increase unemployment.
Answer: A
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28) Why might firms pay wages that are above the equilibrium wage in a market?
A) to increase the productivity of their workers
B) to reduce the unemployment rate
C) to encourage workers to form labour unions
D) to reduce profit
E) to avoid federal corporate income taxes
Answer: A
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29) 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 an increase in unemployment.
B) There will be an increase in the quantity of labour demanded by firms.
C) There will be a decrease in the quantity of labour supplied by households.
D) There will be a decrease in automation.
E) All of the above will occur.
Answer: A
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Figure 5.1
30) 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) Both A and C will occur.
Answer: B
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31) 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 rise.
B) The unemployment rate will fall.
C) The level of unemployment will rise, but the percentage of the labour force unemployed will not
change.
D) The quantity of labour supplied will rise.
E) None of the above will occur.
Answer: E
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32) Labour unions cause unemployment because the union contract wage is set
A) below the market wage, causing a shortage of labour.
B) below the market wage, causing a surplus of labour.
C) above the market wage, causing a surplus of labour.
D) above the market wage, causing a shortage of labour.
E) equal to the market clearing wage.
Answer: C
2CE: 1CE
33) Observing that Costco pays its employees much more than Walmart does leads economists to think
A) Costco is paying an efficiency wage in an effort to maximize profit.
B) Costco employees have a powerful union.
C) Costco's owners are not interested in maximizing profits.
D) Walmart is consistently breaking Canada's labour laws.
E) Costco's ownership must be more motivated by fairness than Walmart.
Answer: A
2CE: 1CE
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
Special Feature: Making the Connection: Why Does Costco Pay Its Workers More than Walmart?
34) The unemployment rate has historically been higher in Canada than in the United States.
Answer: TRUE
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35) The unemployment rate is higher with a minimum wage law than it would be without a minimum
wage law.
Answer: TRUE
2CE: 1CE
36) Paying efficiency wages are a way for a company to cut costs and become more efficient, and are
therefore lower than market wages.
Answer: FALSE
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37) 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.
2CE: 1CE
38) 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.
2CE: 1CE
51
39) 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.
2CE: New to 2CE
5.4 Measuring Inflation
1) The average price of goods and services in the economy is also known as
A) the price level.
B) the inflation rate.
C) a market basket.
D) the cost of living.
E) average expenditure.
Answer: A
Topic: Inflation Rate
Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed
2) 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) remain the same.
C) decrease.
D) equal 20%.
E) cannot be determined.
Answer: A
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3) Which of the following is true about the consumer price index?
A) It accounts for people switching to goods whose prices have fallen.
B) It assumes that consumers purchase the same amount of each product in the market basket each
month.
C) It updates yearly to allow for new products to be added to the market basket.
D) It filters out the part of price increases that occurs because of quality improvements in products.
E) It updates yearly to account for changes in the places where people shop.
Answer: B
Topic: Consumer Price Index
4) Which of the following price indices comes closest to measuring the cost of living of the typical
household?
A) GDP deflator
B) producer price index
C) consumer price index
D) household price index
E) house price index
Answer: C
5) Which of the following would be the best measure of the cost of living?
A) real GDP
B) real GDP per person
C) GDP deflator
D) consumer price index
E) purchasing managers' index
Answer: D
6) 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 of the prices of the goods and services purchased by a typical urban family of four.
D) average of the prices of new final goods and services produced in the economy over a period of time.
E) average price of consumer data purchased from Facebook.
Answer: C
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Table 5.2
Base Year (2002) 2014
Product Quantity Price Price
Milk 50 $1.20 $1.50
Bread 100 1.00 1.10
7) 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 2002 and 2014 for price and quantity. The Consumer Price Index
for 2014 equals
A) 118.
B) 116.
C) 86.
D) 85.
E) 76.
Answer: B
Table 5.3
Base Year (2002) 2014
Product Quantity Price Price
Cokes 100 $0.50 $0.75
Hamburgers 200 2.00 2.50
CDs 10 20.00 21.00
8) 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 2002 and 2014 for price and quantity. The
Consumer Price Index for 2014 equals
A) 75.
B) 93.
C) 108.
D) 121.
E) 132.
Answer: D
54
Table 5.4
Base Year (2002) 2014
Product Quantity Price Quantity Price
Meat 100 $10 120 $12
Potatoes 200 2 180 3
9) 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 2002 and 2014 for price and quantity. The Consumer Price
Index for 2014 equals
A) 125.
B) 129.
C) 135.
D) 141.
E) 153.
Answer: B
10) The percent increase in the CPI from one year to the next is a measure of the
A) GDP deflator.
B) unemployment rate.
C) real interest rate.
D) inflation rate.
E) GDP growth rate.
Answer: D
11) Assume the average annual CPI values for 2016 and 2017 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
55
12) A consumer price index of 160 in 2017 with a base year of 2002 would mean that the cost of the
market basket
A) equaled $160 in 2017.
B) equaled $160 in 2002.
C) rose 160% from the cost of the market basket in the base year.
D) rose 60% from the cost of the market basket in the base year.
E) is 160 times more than it cost in 2002.
Answer: D
Table 5.5
Year CPI
2016 207
2017 215
13) Refer to Table 5.5. Consider the above values of the consumer price index for 2016 and 2017. The
inflation rate for 2017 was equal to
A) 215 percent.
B) 21.5 percent.
C) 8.0 percent.
D) 3.9 percent.
E) 2.5 percent.
Answer: D
Special Feature: Don't Let This Happen to You: Don't Miscalculate the Inflation Rate
56
Table 5.6
Year CPI
2015 157
2016 161
2017 163
14) Refer to Table 5.6. Consider the above values of the consumer price index for 2015, 2016, and 2017.
The inflation rate for 2016 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
15) 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) 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 real income.
D) less than 9 times as much as your grandfather in terms of nominal income.
E) more than 9 times as much as your grandfather in terms of nominal income.
Answer: C
16) 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 producer price index.
B) the consumer price index.
C) the GDP deflator.
D) the household price index.
E) the Baltic dry index.
Answer: A
Topic: Producer Price Index
57
17) 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) change; overestimates
B) change; underestimates
C) do not change; overestimates
D) do not change; underestimates
Answer: A
Topic: Is the CPI Accurate?
18) 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) also; understate
B) also; overstate
C) not; understate
D) not; overstate
Answer: D
19) The "new product bias" in the consumer price index refers to the idea that
A) consumers switch to new goods when the prices of old goods increase, and the CPI overestimates the
cost to consumers.
B) consumers switch to old goods when the prices of new goods increase, and the CPI underestimates
the cost to consumers.
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) new products' prices often decrease after their initial introduction, and the CPI is adjusted
infrequently and overestimates the cost to consumers.
E) 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.
Answer: D
58
20) The iPhone 7 was launched without a headphone jack. This "innovation" is will mean
A) the CPI will understate inflation as cheap headphones must be replaced with more expansive
wireless ones.
B) the CPI will overstate inflation because lack of a headphone jack is an example of a quality
improvement.
C) the CPI will understate inflation due to the new product bias.
D) the CPI will overstate inflation due to the outlet bias as people buy new phones at iStores.
E) the CPI will understate inflation due to the outlet bias.
Answer: A
2CE: New to 2CE
21) The consumer price index implicitly assumes that the demand curve for each good and service in
the representative market basket is
A) positively sloped.
B) negatively sloped.
C) vertical.
D) horizontal.
E) backward bending.
Answer: C
22) Most economists believe that the biases in the consumer price index cause the CPI to overstate the
true inflation rate by about
A) one-half to one percentage point.
B) one to two percentage points.
C) one quarter percentage point.
D) one and one-half percentage points.
E) more than two percentage points.
Answer: A
59
23) Which of the following would be a consequence of substitution bias in the CPI?
A) Social Security payments would not adequately compensate retired workers for inflation.
B) Businesses would overcompensate employees for inflation when giving the cost of living rises.
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) Economists make errors in estimating inflation when using substitutes for the CPI such as GDP
deflator.
Answer: B
24) 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) alcohol and tobacco
B) health and personal care
C) stocks and savings
D) clothing and footwear
E) shelter
Answer: C
Topic: Consumer Confidence
25) The producer price index measures the prices that firms
A) pay for imported natural resources that go into the production process.
B) receive for the goods and services they export.
C) receive for the goods and services they use at all stages of production.
D) pay for labour, whether or not the labour is foreign or domestic.
E) pay the government in taxes and licencing fees.
Answer: C
26) The inflation rate measures the average prices of goods and services in the economy.
Answer: FALSE
60
27) 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: FALSE
2CE: New to 2CE
28) Shelter is the largest component of the Canadian CPI market basket.
Answer: TRUE
29) The GDP deflator is the best measure that reflects the prices of goods and services purchased by the
typical household.
Answer: FALSE
Topic: Price Indexes
30) 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.
61
Table 5.7
Base Year
Product Quantity Price (2002) Price (2013) Price (2014)
Tacos 5 $1.50 $2.00 $2.25
Earplugs 10 6.00 7.50 7.00
Toothbrushes 3 2.50 3.50 3.50
31) 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 2014, 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%.
32) The broadest measure of the price level that includes all final goods and services is
A) the producer price index.
B) the consumer price index.
C) the GDP deflator.
D) the wholesale price index.
E) house price index.
Answer: C
2CE: 1CE
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and deflation
33) The most widely used measure of inflation is based on which of the following price indices?
A) the producer price index
B) the consumer price index
C) the GDP deflator
D) the wholesale price index
E) the S&P 500 index
Answer: B
2CE: 1CE
62
34) The CPI is also referred to as
A) the GDP deflator.
B) the inflation-consumption index.
C) the cost-of-living index.
D) the producer price index.
E) the consumer profitability indicator.
Answer: C
2CE: 1CE
35) Which of the following is the smallest portion of the market basket of goods that makes up the CPI?
A) shelter
B) food
C) transportation
D) alcohol and tobacco
E) clothing
Answer: D
2CE: 1CE
Table 5.8
CPI
Year
(2002 = 100)
2014 124.5
2013 122.7
36) 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 2013 and 2014?
A) 1.5%
B) 1.8%
C) 22.7%
D) 24.5%
E) 101%
Answer: A
2CE: 1CE
63
Table 5.9
CPI
Year
(2002 = 100)
2002 100
2003 120
37) 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 2002 and 2003?
A) 2%
B) 5%
C) 10%
D) 12%
E) 20%
Answer: E
2CE: 1CE
Table 5.10
CPI
Year
(2002 = 100)
2010 100
2011 113
38) 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 2010 and 2011.
A) 2%
B) 5%
C) 8%
D) 11%
E) 13%
Answer: E
2CE: 1CE
64
39) Monthly expenditures for a family of 4 in 2010 averaged $1,400. In 2011, 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
2CE: 1CE
40) If the CPI changes from 125 to 120 between 2010 and 2011, how did prices change between 2010 and
2011?
A) Prices increased by 5%.
B) Prices decreased by 5%.
C) Prices increased by 25%.
D) Prices decreased by 4%.
E) Prices increased by 125%.
Answer: D
2CE: 1CE
41) Which of the following describes the accuracy of the Consumer Price Index?
A) Changes in the CPI accurately reflect the true rate of inflation.
B) Changes in the CPI understate the true rate of inflation.
C) Changes in the CPI overstate the true rate of inflation.
D) Changes in the CPI are unrelated to the true rate of inflation.
Answer: C
2CE: 1CE
65
42) 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 increased by 2.9%.
C) The cost of living has increased by 12.7%.
D) The cost of living has decreased by 6%.
E) The cost of living has decreased by 5.1%.
Answer: B
2CE: 1CE
43) 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 the true rate of inflation.
B) changes in the CPI understate the true rate of inflation.
C) changes in the CPI overstate the true rate of inflation.
D) changes in the CPI are unrelated to the true rate of inflation.
Answer: C
2CE: 1CE
44) 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
2CE: 1CE
66
45) The formula for calculating the CPI is
A) (expenditures in the current year/expenditures in the base year) × 100.
B) (expenditures in the current year × expenditures in the base year)/100.
C) (expenditures in the base year/expenditures in the current year).
D) (expenditures in the base year × 100)/(expenditures in the current year).
E) (expenditures in the current year)/(average of base year and current year expenditure) × 100.
Answer: A
2CE: 1CE
46) 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) outlet bias.
B) increase in quality bias.
C) substitution bias.
D) discrimination bias.
E) new product bias.
Answer: C
2CE: 1CE
47) 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) outlet; the CPI underestimating the true change in the cost of living
B) new product; the CPI overestimating the true change in the cost of living
C) outlet; the CPI overestimating the true change in the cost of living
D) new product; 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: B
2CE: 1CE
67
48) What is outlet bias?
A) the tendency for households to spend more money over time
B) the tendency for households to spend their money at discount stores as prices rise
C) the tendency for the quality of products to improve over time even though the CPI does not measure
changes in quality
D) the tendency for consumers to purchase newer, more technologically advanced products even
though they have higher prices
E) the tendency for households to substitute one good for another in response to price changes
Answer: B
2CE: 1CE
49) 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) outlet bias.
B) substitution bias.
C) new product bias.
D) increase in quality bias.
E) brick and mortar bias.
Answer: A
2CE: New to 2CE
50) 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) increase in quality bias
C) substitution bias
D) outlet bias
E) moore's law bias
Answer: B
68
Table 5.11
Expenditure
(on base year
Quantity Expenditure Price quantities)
Product (2011) Price (2011) (2011) (2016) (2016)
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
51) 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 2011 is the base year, then what is the CPI for 2016?
A) 14.3
B) 87.5
C) 93.2
D) 114.3
E) 160
Answer: B
2CE: 1CE
Table 5.12
Expenditure
(on base year
Quantity Price Expenditure Price quantities)
Product (2011) (2011) (2011) (2015) (2015)
Hair cuts 6 $50 $300 $70 $420
Backpacks 4 25 100 30 120
Tacos 100 1 100 5 500
Total $500 $1,040
52) 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 2011 is the base year, then what is the CPI for 2015?
A) 40.08
B) 100
C) 180
D) 208
E) 251
Answer: D
2CE: 1CE
69
53) The PPI is the
A) price parity index.
B) prime producer index.
C) producer price index.
D) production performance indicator.
E) partial prime interest rate.
Answer: C
2CE: 1CE
54) What does the PPI measure?

A) the average change in the prices paid for all goods produced in the economy over a given year
B) the average of the prices received by producers of goods and services at all stages of the production
process
C) the level of production of goods and services generated in the economy in a given year
D) the difference between the prices consumers pay for goods and services and the prices producers
pay for goods and services
E) the average change in prices paid by producers for their factors of production
Answer: B
2CE: 1CE
55) The inflation rate measures the percentage increase in the price level from one year to the next.
Answer: TRUE
2CE: 1CE
56) If the CPI falls from 142 to 140 between two consecutive years, this implies that prices fell by 2%
between those two years.
Answer: FALSE
2CE: 1CE
70
57) The producer price index tracks the prices firms receive for goods and services at all stages of
production.
Answer: TRUE
2CE: 1CE
58) List three different price indices and explain how they differ in terms of the market basket on which
they are based.
Answer: Three examples of price indices are the GDP deflator, the consumer price index, and the
producer price index. All three differ by the kinds of goods that are contained in the market basket that
is used to calculate the average level of prices. The GDP deflator is based on the average price of all final
goods and services produced. The consumer price index is based on the average price of goods/services
purchased by the typical urban family. The producer price index is based on the prices received by
producers of goods and services at all stages of the production process.
2CE: 1CE
59) Explain how the CPI is constructed.

Answer: Statistics Canada surveys a sample of Canadian households to determine their spending
habits and to construct a listing or market basket of these goods. The survey is also used to determine
the importance of the items in the consumer's budget. Each month Statistics Canada collects the prices
of the goods in the market basket. A weighted average is taken of those prices, with the more important
items receiving higher weights. A base year is chosen and the CPI is set to 100 in the base year. In every
other year, the CPI is calculated as the ratio of the cost of the market basket in that year, divided by the
cost of the market basket in the base year, times 100.
2CE: 1CE
71
Table 5.13
Base Year
Product Quantity Price (2002) Price (2011) Price (2012)
Burritos 10 $1.00 $1.50 $1.75
Flashlights 15 5.00 7.00 6.75
Golf balls 8 2.00 3.00 3.50
60) Refer to Table 5.13. Consider a simple economy that produces only three products: burritos,
flashlights, and golf balls. Use the information in the table to calculate the inflation rate for 2012, as
measured by the consumer price index.
Answer: Total expenditures for 2002 = (10 × $1.00) + (15 × $5.00) + (8 × $2.00) = $101.00
Total expenditures for 2011 = (10 × $1.50) + (15 × $7.00) + (8 × $3.00) = $144.00
Total expenditures for 2012 = (10 × $1.75) + (15 × $6.75) + (8 × $3.50) = $146.75
The CPI for 2011 = [($144.00/$101.00) × 100] = 142.57

The CPI for 2012 = [($146.75/$101.00) × 100] = 145.30
So, the inflation rate for 2012 = [((145.30 − 142.57)/142.57) × 100)] =1.9%.
2CE: 1CE
5.5 Using Price Indexes to Adjust for the Effects of Inflation
1) The real wage equals the nominal wage ________ the CPI, all times 100.
A) divided by
B) times
C) minus
D) plus
E) to the power of
Answer: A
Topic: Adjusting for Inflation
Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation
2) If your nominal wage rises faster than the price level, we can say your real wage has ________ and the
purchasing power of your income has ________.
A) fallen; fallen
B) fallen; risen
C) risen; risen
D) risen; fallen
Answer: C
72
3) You earned $30,000 in 1995, and your salary rose to $80,000 in 2016. If the CPI rose from 82 to 202
between 1995 and 2016, which of the following is true?
A) There was deflation between 1995 and 2016.
B) The purchasing power of your salary fell between 1995 and 2016.
C) The purchasing power of your salary remained constant between 1995 and 2016.
D) The purchasing power of your salary increased between 1995 and 2016.
E) There is no way to compare the purchasing power of your salary between 1995 and 2016.
Answer: D
Table 5.14
Nominal Average
Year Hourly Earnings CPI (2002 = 100)
1956 $1.53 14.3
2015 25.14 127.3
The table above reports the nominal average hourly wage and the consumer price index for 1956 and
2012.
4) Refer to Table 5.14. The real average hourly earnings for 1956 in 2002 dollars equals
A) $0.22.
B) $10.70.
C) $13.02.
D) $21.88.
E) $25.32.
Answer: B
Special Feature: Solved Problem: Calculating Real Average Hourly Wages
5) Refer to Table 5.14. The percentage change in real average wage from 1956 to 2015 equals
A) 2.0 percent.
B) 8.7 percent.
C) 21.7 percent.
D) 84.6 percent.
E) 154.3 percent.
Answer: D
73
6) Refer to Table 5.14. The real average hourly earnings for 1956 in 2015 dollars equal
A) $1.53.
B) $2.82.
C) $10.69.
D) $13.62.
E) $15.83.
Answer: D
Table 5.15
Nominal Average
Year CPI
Hourly Earnings
2015 $15 100
2016 15 105
2017 18 110
7) Refer to Table 5.15. Looking at the table above, real average hourly earnings in 2015 were
A) $9.00.
B) $14.29.
C) $15.00.
D) $16.50.
E) $19.82.
Answer: C
8) Refer to Table 5.15. Looking at the table above, real average hourly earnings were equal to ________
in 2016.
A) $13.63
B) $14.29
C) $15.00
D) $16.50
E) $18.36
Answer: B
74
9) Suppose your grandfather earned a salary of $12,000 in 1964. If the CPI is 31 in 1964 and 219 in 2017,
then the value of your grandfather's salary in 2017 dollars is approximately
A) $84,774.
B) $63,830.
C) $37,200.
D) $26,280.
E) $19,568.
Answer: A
10) Nominal income is equal to real income if the CPI is less than 100.
Answer: FALSE
11) Currently, the base year for the CPI is 2002.

Answer: TRUE
75
Table 5.16
Median Salary:
Year New York Yankees CPI
1989 $500,000 124
2009 5,200,000 216
Salaries in major league baseball have soared over the last 30 to 40 years. Some of the salary increase is
due to inflation. The table above reports the consumer price index and the median nominal salary of the
New York Yankees for 1989 and 2009.
Source: USA Today Salaries Database, asp.usatoday.com/sports/baseball/salaries/default.aspx
12) Refer to Table 5.16. Calculate the real median salary of the New York Yankees in both 1982-1984
dollars and 2009 dollars. Calculate the percentage increase in the median salary of the Yankees from
1989 to 2009 in both nominal terms and in real terms.
Answer: Real median salary = × 100.
Real median salary in 2009 dollars =

Real median salary in 1982-1984 dollars ×
Median CPI Real Median Real Median

Salary: New (1982-1984 = Salary (1982- Salary
Year York Yankees 100) 1984 dollars) (2009 dollars)
1989 $500,000 124 $403,226 $870,968
2009 5,200,000 216 2,407,407 5,200,000
In nominal terms, the median salary increased × 100 = 940 percent
In real terms, the median salary increased × 100 = 497 percent

76
13) The CPI in 1997 was 90.4, and the CPI in 2015 was 126.6. If you earned a salary of $60,000 in 1997,
what would be a salary with equivalent purchasing power in 2016?
A) $54,240
B) $75,960
C) $84,027
D) $127,214
E) $136,841
Answer: C
14) If your nominal wage rises more slowly than the price level, we can say your real wage has ________
and the purchasing power of a dollar has ________.
A) fallen; fallen
B) fallen; risen
C) risen; risen
D) risen; fallen
Answer: A
2CE: 1CE
Table 5.17
Nominal Average CPI
Year
Hourly Earnings (2002 = 100)
2015 $25.11 126.6
2016 25.48 128.1
2017 25.90 131.5
15) Refer to Table 5.17. Looking at the table above, nominal wages ________ from 2016 to 2017, and real
wages ________ from 2016 to 2017.
A) rose; rose
B) rose; fell
C) fell; rose
D) fell; fell
Answer: B
Special Feature: Solved Problem: Calculating Real Hourly Wages
77
Table 5.18
Nominal Average CPI
Year
Hourly Earnings (2002 = 100)
2015 $25.11 126.6
2016 25.48 128.1
2017 25.90 131.2
16) Refer to Table 5.18. Looking at the table above, the real average hourly wage in 2015 was
A) $19.13 in 2002 dollars.
B) $19.89 in 2002 dollars.
C) $26.30 in 2002 dollars.
D) $314.80 in 2002 dollars.
E) $423.93 in 2002 dollars.
Answer: B
17) Refer to Table 5.18. Looking at the table above, real average hourly earnings between 2015 and 2016
changed by
A) 0.3%.
B) 1.5%.
C) 2.2%.
D) 5%.
E) 6.5%.
Answer: A
18) Refer to Table 5.18. Looking at the table above, real hourly earnings between 2016 and 2017
changed by
A) -1.8 percent.
B) -0.75 percent.
C) 0.3 percent.
D) 1.6 percent.
E) 2.4 percent.
Answer: B
2CE: New to 2CE
78
19) Between 2014 and 2015, the CPI of a small nation rose from 182 to 185. If household incomes rose by
3% during that period of time, which of the following is true?
A) The purchasing power of household income rose between 2014 and 2015.
B) The purchasing power of household income fell between 2014 and 2015.
C) The purchasing power of household income remained constant between 2014 and 2015.
D) The CPI cannot be used to determine how the purchasing power of household income changes over
time.
Answer: A
2CE: 1CE
Table 5.19
Nominal Average Hourly CPI
Year
Earnings (2002 = 100)
2011 $23.00 119.9
2012 23.50 121.7
2013 24.00 122.8
20) Refer to Table 5.19. Looking at the table above, what is the rate of growth of real average hourly
earnings from 2012 to 2013?
A) 1.2%
B) 2%
C) 4.3%
D) -1%
E) -1.8 %
Answer: A
2CE: 1CE
21) Refer to Table 5.19. Looking at the table above, what is the approximate rate of growth of real
average hourly earnings from 2011 to 2012?
A) 0.67%
B) 2%
C) 0%
D) -2%
E) -0.5%
Answer: A
2CE: 1CE
79
22) Refer to Table 5.19. Looking at the table above, what is the rate of growth of the average price level
from 2011 to 2012?
A) 0.9%
B) 1.5%
C) 2%
D) 2.1%
E) 19%
Answer: B
2CE: 1CE
23) Refer to Table 5.19. Looking at the table above, what is the rate of growth of the average price level
from 2012 to 2013?
A) 0.9%
B) 1.5%
C) 2%
D) 2.6%
E) 5.25%
Answer: A
2CE: 1CE
24) To obtain real average hourly earnings, nominal average hourly earnings are multiplied by the CPI.
Answer: FALSE
2CE: 1CE
25) The CPI in 2014 was 125.2, while the CPI in 1991 was 82.8. If you had $5,000 in 1981, its equivalent
purchasing power in 2014 would be $3306.71.
Answer: FALSE
2CE: 1CE
80
Table 5.19
Nominal Average Hourly CPI
Year
Earnings (2002 = 100)
2011 $23.00 119.9
2012 23.50 121.7
2013 24.00 122.8
26) Refer to Table 5.19. Using the above table, calculate real average hourly earnings for 2011, 2012, and
2013. Calculate the rate of growth of real average hourly earnings from 2012 to 2013.
Answer: Real average hourly earnings in 2011 are × 100 = $19.18 in 2002 dollars.
Real average hourly earnings in 2012 are × 100 = $19.31 in 2002 dollars.
Real average hourly earnings in 2013 are × 100 = $19.54 in 2002 dollars.
The rate of growth of real average hourly earnings from 2012 to 2013 is
× 100% = 1.2%.

2CE: 1CE
81
Table 5.20
CPI
Year Nominal Minimum Wage
(2002 = 100)
1981 $3.50 49.5
2015 11.00 126.6
27) Refer to Table 5.20. The table above lists the actual minimum wage and CPI in 1981 and in 2015.
Using the above table, calculate the real minimum wage for 1981 and 2015. Calculate the rate of growth
of the real minimum wage from 1981 to 2015. Are workers better off in terms of the purchasing power
of a dollar in 1981 or 2015? Explain why.
Answer: The real minimum wage in 1981 is × 100 = $7.07 in 2002 dollars.
The real minimum wage in 2015 is × 100 = $8.69 in 2002 dollars.
The rate of growth of the real wage from 1981 to 2015 is × 100 = 22.9%
Workers who earned the minimum wage were better off in 2015 as compared to 1981. The value of the
real minimum wage was higher in 2015. It has increased by 22.9% from 1981 to 2015. The nominal
minimum wage rose faster than the general price level.
82
5.6 Real versus Nominal Interest Rates
1) The nominal interest rate equals the real interest rate ________ the inflation rate.
A) times
B) divided by
C) plus
D) minus
E) to the power of
Answer: C
Topic: Real vs. Nominal Interest Rates
Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate
2) The real interest rate equals the nominal interest rate ________ the inflation rate.
A) times
B) divided by
C) plus
D) minus
E) to the power of
Answer: D
3) The stated interest rate on a loan is the

A) real interest rate.
B) nominal interest rate.
C) actual inflation rate.
D) expected inflation rate.
E) the past interest rate.
Answer: B
4) If the nominal rate of interest is 6.5% and the inflation rate is 3.0%, what is the real rate of interest?
A) -9.5%
B) -3.5%
C) 1.5%
D) 3.5%
E) 9.5%
Answer: D
83
5) Imagine that you borrow $5,000 for one year and at the end of the year you repay the $5,000 plus $600
of interest. If the inflation rate was 4%, what was the real interest rate you paid?
A) 16 percent
B) 12 percent
C) 8 percent
D) 6 percent
E) 3 percent
Answer: C
6) Imagine that you borrow $1,000 for one year and at the end of the year you repay the $1,000 plus $100
of interest. If the inflation rate was 7%, what was the real interest rate you paid?
A) 17 percent
B) 10 percent
C) 7 percent
D) 3 percent
E) 1.5 percent
Answer: D
7) Suppose you borrow $1,000 at an interest rate of 12 percent. If the expected real interest rate is 5
percent, then the rate of inflation over the upcoming year that would be most beneficial to you would
be a rate of inflation
A) equal to 0 percent.
B) greater than 7 percent.
C) equal to 7 percent.
D) less than 7 percent.
E) equal to 3 percent.
Answer: B
84
8) Suppose you lend $1,000 at an interest rate of 10 percent over the next year. If the expected real
interest rate at the beginning of the loan contract is 4 percent, then what rate of inflation over the
upcoming year would be most beneficial to you as the lender? An inflation rate
A) less than 6 percent.
B) greater than 6 percent.
C) equal to 6 percent.
D) equal to 4 percent.
Answer: A
9) You lend $5,000 to a friend for one year at a nominal interest rate of 10%. Inflation during that year is
5%. As a result, you will receive ________ at the end of the year, but that money has a purchasing power
of ________.
A) $5,050; $5,025
B) $5,100; $5,050
C) $5,500; $5,250
D) $6,000; $5,500
E) $5,500; $6,000
Answer: C
10) When deflation occurs,

A) the real interest rate is greater than the nominal interest rate.
B) the nominal interest rate is greater than the real interest rate.
C) the nominal interest rate is equal to the real interest rate and inflation is negative.
D) the nominal interest rate is equal to the real interest rate and inflation is positive.
E) the real interest rate is positive while the nominal interest rate is negative.
Answer: A
Topic: Deflation
11) When prices are rising, which of the following will be true?
A) The real interest rate will be lower than the nominal interest rate.
B) The real interest rate will be negative.
C) The real interest rate will be higher than the nominal interest rate.
D) The nominal interest rate will be negative.
E) The nominal interest rate will be lower the real interest rate.
Answer: A
85
12) In 2016 the nominal interest rate paid by banks on savings deposits was 0.55 percent. At the same
time the inflation rate was 1.5 percent. What was the real interest rate paid on savings?
A) -2.05 percent
B) -1.05 percent
C) 0.55 percent
D) 2.05 percent
E) 3.10 percent
Answer: B
2CE: New to 2CE
13) The nominal interest rate plus the inflation rate equals the real interest rate.
Answer: FALSE
14) If inflationary expectations are increasing, we would expect that the nominal interest rate would
also be increasing, holding all else constant.
Answer: TRUE
15) Real interest rates at times have been negative. Why would anyone lending money agree to a
negative real interest rate?
Answer: The lender did not agree to a negative real interest rate, instead unanticipated inflation
occurred. If the actual inflation rate exceeds the anticipated inflation rate, the actual real interest rate
received by lenders and paid by borrowers can end up negative.
16) During the 1990s, Japan experienced periods of deflation and very low nominal interest rates,
approaching zero percent. Why would lenders of money agree to a nominal interest rate of almost zero?
Answer: With the deflation, the real interest rate exceeded the nominal interest rate. Lenders were
making their decisions based on the higher real interest rate, not the very low nominal interest rate.
86
17) During a deflationary period,
A) the nominal interest rate is less than the real interest rate.
B) the real interest rate is less than the nominal interest rate.
C) the price level rises.
D) the nominal interest rate does not change.
E) the nominal interest rate will be negative.
Answer: A
2CE: 1CE
Learning Outcome: Macro 12: Explain how monetary policy influences interest rates, aggregate demand, real GDP,
and inflation
18) The real rate of interest is

A) the nominal interest rate plus the inflation rate.
B) the nominal interest rate minus the inflation rate.
C) the interest rate determined by the supply and demand in the money market.
D) the nominal interest rate.
E) the interest rate stated on a loan contract.
Answer: B
2CE: 1CE
and inflation
19) If the nominal interest rate is 6% and the inflation rate is 9%, then the real interest rate is
A) -3%.
B) 3%.
C) 6.67%.
D) 15%.
E) 25%.
Answer: A
2CE: 1CE
and inflation
87
20) If you want to earn a real interest rate of 3% on money you lend, and you expect that inflation will
be 2%, what nominal rate of interest will you charge?
A) 1%
B) 5%
C) 6%
D) 9%
E) 12%
Answer: B
2CE: 1CE
and inflation
21) If the nominal interest rate is 6% and the inflation rate is 2%, then the real interest rate is
A) 8%.
B) 4%.
C) 3%.
D) 2%.
E) 1%.
F) -8%.
Answer: B
2CE: 1CE
and inflation
22) You lend $5,000 to a friend for one year at a nominal interest rate of 10%. The CPI over that year
rises from 180 to 190. What is the real rate of interest you will earn?
A) 0%
B) 4.4%
C) 5.5%
D) 5.8%
E) 7.8%
Answer: B
2CE: 1CE
and inflation
88
23) You borrow $10,000 from a bank for one year at a nominal interest rate of 5%. If inflation over the
year is 2%, what is the real interest rate you are paying?
A) 2%
B) 2.5%
C) 3%
D) 5%
E) 7%
Answer: C
2CE: 1CE
and inflation
24) You borrow $10,000 from a bank for one year at a nominal interest rate of 5%. The CPI over that year
rises from 180 to 200. What is the real interest rate you are paying?
A) 15%
B) 5%
C) -1.1%
D) -6.1%
E) -8.1%
Answer: D
2CE: 1CE
and inflation
25) The nominal interest rate will be less than the real interest rate when
A) the rate of inflation is positive but decreasing.
B) the rate of inflation is positive and increasing.
C) the rate of inflation is negative.
D) the real interest rate is negative.
E) the rate of inflation is positive and constant.
Answer: C
2CE: 1CE
and inflation
89
26) You agree to lend $1,000 for one year at a nominal interest rate of 10%. You anticipate that inflation
will be 4% over that year. If inflation is instead 3% over that year, which of the following is true?
A) The real interest rate you earn on your money is lower than you expected.
B) The purchasing power of the money that will be repaid to you will be lower than you expected.
C) The person who borrowed the $1,000 will be worse off as a result of the unanticipated decrease in
inflation.
D) The real interest rate you earn on your money will be negative.
E) The unexpected inflation has increased the opportunity cost of making the loan.
Answer: C
2CE: 1CE
and inflation
27) The nominal interest rate minus the inflation rate equals the real interest rate.
Answer: TRUE
2CE: 1CE
and inflation
28) If inflation is higher than expected, this helps borrowers (by reducing the real interest rate they pay)
and hurts lenders (by reducing the real interest rate they receive).
Answer: TRUE
2CE: 1CE
and inflation
29) What is the difference between the nominal interest rate and the real interest rate?
Answer: The nominal interest rate is the stated interest rate on a loan, while the real interest rate is the
nominal interest rate minus the inflation rate.
2CE: 1CE
and inflation
90
30) Suppose you obtain a fixed rate mortgage during a period of relatively high inflation. During the
next ten years, inflation falls. Are you a winner or a loser due to inflation? Explain why.
Answer: You would be a loser under this scenario. Your mortgage rate is the sum of the real rate of
interest plus the amount of inflation that was expected over the life of the mortgage. When inflation is
high, people's expectations of future inflation are high. In those circumstances, your fixed mortgage rate
contains a high expected-inflation premium. Therefore, as inflation falls, the real rate of interest on your
mortgage increases.
2CE: 1CE
and inflation
5.7 Does Inflation Impose Costs on the Economy?
1) Suppose that in 2019, all prices in the economy double and that all wages and salaries have also
doubled. In 2019 you
A) are worse off than you were in 2018 as you can no longer afford to buy as many goods and services.
B) are better off than you were in 2018 as your salary is higher than it was in 2018 and you can now buy
more goods and services.
C) are no better off or worse off than you were in 2018 as the purchasing power of your salary has
remained the same.
D) cannot determine whether you are better off or worse off than you were in 2018 because the
purchasing power of your salary cannot be determined.
E) are better off as an increase in your income always increases your options.
Answer: C
Topic: Inflation and the Distribution of Income
Learning Outcome: 5.7 Discuss the problems inflation can cause
2) Which of the following describes a situation in which the person is hurt by inflation?
A) a retiree whose pension is adjusted for inflation
B) a person who borrows money during a period when inflation is underpredicted
C) a person who lends money during a period when inflation is overpredicted
D) a person paid a fixed income during an inflationary period
E) a worker who gets regular cost of living adjustments
Answer: D
91
3) If inflation is positive and is perfectly anticipated
A) those that borrow money lose.
B) those that lend money lose.
C) those that hold paper money lose.
D) no one in the economy loses.
E) those who receive government benefits lose.
Answer: C
Topic: Anticipated Inflation
4) Suppose that at the beginning of a loan contract, the real interest rate is 4% and expected inflation is
currently 6%. If actual inflation turns out to be 7% over the loan contract period, then
A) borrowers gain 1% of the loan value.
B) lenders gain 1% of the loan value.
C) borrowers lose 3% of the loan value.
D) lenders gain 3% of the loan value.
E) lenders gain 2% of the loan value.
Answer: A
Topic: Unanticipated Inflation
5) The cost to firms of changing prices

A) is small even when there is rapid inflation.
B) is called a menu cost.
C) does not exist if inflation is perfectly anticipated.
D) will make prices perfectly fixed.
E) all of the above
Answer: B
6) When actual inflation is less than expected inflation,

A) borrowers lose and lenders gain.
B) borrowers gain and lenders lose.
C) borrowers and lenders both gain.
D) borrowers and lenders both lose.
Answer: A
92
7) Which of the following is not an example of inflation causing a redistribution of income because the
inflation was unanticipated?
A) A firm signs a 3-year contract with a union based on a 2 percent anticipated rate of inflation per year,
and the actual rate of inflation ends up being 7 percent per year.
B) A worker receives a raise in salary that is less than the rate of inflation because management
underpredicted inflation.
C) Firms have to hire an extra worker to change prices in its store because of inflation.
D) A bank collects a lower amount of interest from a loan because inflation was underpredicted.
E) A professional pays more income taxes because tax brackets were not adjusted for inflation.
Answer: C
8) Which of the following is a cost of anticipated inflation?

A) the real interest rate differs from what borrowers and lenders expected
B) the risk associated with lending decreases
C) the value of cash held by consumers falls
D) economics classes become harder
E) workers nominal income will rise
Answer: C
2CE: New to 2CE
9) The costs to firms of changing prices are called menu costs.

Answer: TRUE
10) If inflation is unanticipated, no redistribution of income can occur.

Answer: FALSE
11) If inflation is anticipated, some effects of inflation on the redistribution of income can be avoided.
Answer: TRUE
93
12) Describe how inflation can be costly even if it is anticipated.
Answer: First, there will be redistribution as some incomes fall behind even an anticipated level of
inflation. Second, firms and individuals must hold money to perform transactions. Those holding
money lose purchasing power at a rate equal to inflation. Third, firms must pay individuals to change
prices. These costs, called menu costs, can be substantial at very high levels of inflation. Fourth,
investors have to pay higher taxes on interest and capital gains income as the government taxes nominal
interest and capital gains income. Investors then lose real after-tax income.
13) When the actual inflation rate turns out to be greater than the expected inflation rate, who gains —
the borrower or the lender — and who loses? Explain why.
Answer: The borrower gains because he pays back the loan in cheaper dollars — dollars that have lost
more purchasing power than was expected. The lender loses because she receives dollars that have lost
more purchasing power than was expected.
14) Explain whether you agree or disagree with the following statement: "The reason that inflation is
bad is because it increases the cost of living — the costs of goods and services we buy — without
increasing income in general."
Answer: Disagree. Inflation, in general, must increase both our cost of living and nominal income. The
increases in the prices of goods and services will be paid to the factors of production. Since the
payments to the factors of production make up national income, nominal income will increase, in
general, along with the cost of living.
15) Which of the following individuals would be most negatively affected by anticipated inflation?
A) a retired railroad engineer who receives a fixed income payment every month
B) a union contractor whose pay is adjusted based on changes in the CPI
C) a full-time employee at a pizza parlour who makes more than the minimum wage
D) a student who borrows $10,000 at a nominal interest rate of 5% to finance educational expenses
E) a financial manager who gets paid a percentage of the money they manage
Answer: A
2CE: 1CE
94
16) If inflation is completely anticipated,
A) no one loses in the economy.
B) borrowers lose in the economy.
C) lenders lose in the economy.
D) firms lose because they incur menu costs.
E) income cannot be redistributed.
Answer: D
2CE: 1CE
17) If inflation increases unexpectedly, then

A) borrowers pay a higher real interest rate than they expected.
B) lenders receive a lower real interest rate than they expected.
C) lenders gain and borrowers gain.
D) neither borrowers nor lenders lose.
E) borrowers gain from a higher than expected real interest rate.
Answer: B
2CE: 1CE
18) Which of the following do not suffer the costs of inflation?

A) persons on fixed incomes
B) persons whose incomes rise more rapidly than inflation
C) firms that have to devote more time and labour to raising prices
D) investors who have to pay higher taxes because of the inflation
E) lenders who did not forecast inflation accurately
Answer: B
2CE: 1CE
19) Inflation that is ________ than what is expected benefits ________ and hurts ________.
A) less; lenders; borrowers
B) less; borrowers; lenders
C) greater; lenders; borrowers
D) greater; lenders; no one
E) less; no one; borrowers
Answer: A
2CE: 1CE
95
20) The costs to firms of changing prices are called
A) redistribution costs.
B) menu costs.
C) anticipation costs.
D) money illusion costs.
E) an inflation tax.
Answer: B
2CE: 1CE
21) What are menu costs?

A) the full list of a firm's costs of production
B) the costs to a firm of changing prices
C) the cost to a household of borrowing money when there is deflation
D) the opportunity cost of dining in a restaurant instead of at home
E) the cost of borrowing money to start a restaurant
Answer: B
2CE: 1CE
22) Which of the following is not a cost posed by inflation?

A) Inflation reduces the affordability of goods and services to the average consumer.
B) The money that consumers and firms hold loses its purchasing power.
C) Firms must pay for changing prices on products and printing new catalogues.
D) Banks can lose if they under predict inflation and charge an interest rate that does not completely
compensate for inflation.
E) Firms must hire experts to predict inflation more accurately.
Answer: A
2CE: 1CE
96
23) If inflation is higher than anticipated which of the following is most likely to be true
A) it will be easier to repay your student loans.
B) it will be easier to get a new mortgage.
C) income will be more even distributed than before.
D) forecasting the future inflation rate will become easier.
E) the money in your piggy bank will increase in value.
Answer: A
2CE: New to 2CE
24) The problem with inflation is that as prices rise, consumers can no longer afford to buy as many
goods and services.
Answer: FALSE
2CE: 1CE
25) Inflation redistributes income to a greater extent when the inflation is unanticipated compared to
when the inflation is anticipated.
Answer: TRUE
2CE: 1CE
26) There are no costs to inflation if it is fully anticipated.

Answer: FALSE
2CE: 1CE
97
27) Explain why you would rather be a borrower during a period of unexpected rising inflation, and a
lender during a period of unexpected declining inflation.
Answer: The nominal interest rate includes a charge to compensate the lender for the loss in purchasing
power due to inflation. If inflation unexpectedly rises, the lender does not get compensated enough for
the loss in purchasing power. Likewise, the borrower pays too little to compensate the lender for
inflation. So it is better to be a borrower in times of unexpected rising inflation.
When inflation unexpectedly falls, then the lender gets compensated too much for inflation and the
borrower pays too much for inflation. So it is better to be a lender than a borrower during a period of
unexpected declining inflation.
2CE: 1CE
28) Describe how a lender can lose during inflation if the inflation is unanticipated and the loan is a
fixed-interest-rate loan. How would a variable-interest-rate loan (one that adjusts over the contract
period) eliminate these losses?
Answer: Lenders require compensation for inflation when charging interest. The nominal interest rate
(also called the market interest rate) they charge equals the real rate of interest plus the expected
inflation over the loan contract period. The interest rate they charge is determined at the beginning of
the loan period, so the charge for inflation is a prediction of what the lender thinks inflation will be over
the contract period. If the loan has a fixed rate, the interest rate does not change over the period of the
loan. If the lender underpredicts inflation, then the lender will not be compensated enough for the loss
in purchasing power due to inflation. The lender will lose to the extent of the underprediction.
If the loan is a variable-rate loan, the interest rate can be adjusted upwards if the lender underpredicts
inflation. This can lower the loss to the lender. The variable rate automatically adjusts for mistakes in
predicting inflation. The more frequently the rate can be adjusted, the less the lender's losses.
2CE: 1CE
98

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Macroeconomics, Second Canadian Edition (Hubbard)

5) Statistics Canada would categorize a retiree who is not working as

6) The labour force equals the number of people

Consider the data above for a simple economy.

15) The labour force participation rate equals the

Unemployment rate = × 100.

Unemployed = (Labour force × Unemployment rate)/100

Labour force = (Working-age population × Labour force participation rate) × 100

Labour force participation rate = × 100.

Labour force = (Working-age population × Labour force participation rate)/100

Unemployed = (Labour force × Unemployment rate)/100

35) The labour force is the sum of

38) The unemployment rate is

40) Discouraged workers are classified by Statistics Canada as

41) Discouraged workers are

The labour force participation rate is calculated as:

which equals 10%.

which equals 80%.

1) Frictional unemployment is the result of

5) Structural unemployment is the result of

8) If cyclical unemployment is eliminated in the economy, then

9) Full employment is not considered to be zero unemployment, because

10) The natural rate of unemployment is the amount of unemployment

18) Eliminating frictional unemployment would be good for the economy.

19) Unemployment caused by a business cycle recession is called cyclical unemployment.

28) Which of the following is an example of a worker experiencing cyclical unemployment?

33) An example of a seasonally unemployed worker would be

34) What are the three main kinds of unemployment?

35) When the labour market is at full employment

37) The natural rate of unemployment is made up of

38) An increase in cyclical unemployment will result in

44) Describe the three types of unemployment.

2) Which of the following would increase the unemployment rate?

3) Which of the following would decrease the unemployment rate?

4) Which of the following policies would reduce structural unemployment?

6) The Employment Insurance program has which of the following effects?

8) The increased generosity of unemployment insurance programs in Canada as compared to the

14) Efficiency wages cause unemployment because

17) Efficiency wage is another name for the minimum wage.

27) An efficiency wage

38) Why would a firm pay efficiency wages?

5.4 Measuring Inflation

6) The consumer price index is the

Total $1,600 $1,400

54) What does the PPI measure?

59) Explain how the CPI is constructed.

The CPI for 2011 = [($144.00/$101.00) × 100] = 142.57

5.5 Using Price Indexes to Adjust for the Effects of Inflation

11) Currently, the base year for the CPI is 2002.

Real median salary in 2009 dollars =

Median CPI Real Median Real Median

In nominal terms, the median salary increased × 100 = 940 percent

In real terms, the median salary increased × 100 = 497 percent

Diff: 3 Page Ref: 120

Diff: 3 Page Ref: 120

The real minimum wage in 2015 is × 100 = $8.69 in 2002 dollars.

3) The stated interest rate on a loan is the

10) When deflation occurs,

18) The real rate of interest is

5.7 Does Inflation Impose Costs on the Economy?

5) The cost to firms of changing prices