ECON Macro Principles of

Macroeconomics Canadian 1st Edition

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Chapter 7 - Unemployment and Inflation

1. Which of the following is NOT a cost of unemployment?
a. unemployed people who feel emotional or psychological problems
b. unemployed people whose job skills diminish as time passes
c. lower production potential
d. a higher inflation rate
ANSWER: d

2. Which of the following is NOT a cost of unemployment?

a. unemployed people who feel a loss of self-respect
b. wasted resources
c. unemployed people who experience negative psychological effects
d. higher inflation rates
ANSWER: d

3. Who is included in the civilian labour force?

a. all people in the economy who are NOT retired
b. all people in the economy over 15 years old
c. the adults in the economy between 18 and 65 years old who are able to work
d. the non-institutionalized population over 15 years old in the economy who hold jobs or are looking for work
ANSWER: d

4. Which of the following people would be counted in the labour force?

a. Chou, who lost his job and last looked for work three months ago
b. Stephanie, who holds a Ph.D. in history, but can find only part-time employment at a fast-food restaurant
c. Jordan, who would like to work as a stockbroker but is now a househusband
d. Steffan, who thinks he could easily earn $100,000 per year, despite the opinion of the psychiatrist at the
hospital where he is a resident patient
ANSWER: b

5. Which of the following is a criterion in determining which unemployed individuals are included in the official
unemployment rate?
a. The unemployed person has previously held a job.
b. The unemployed person is actively seeking employment.
c. The unemployed person must be willing to accept a reasonable job offer.
d. The unemployed person must be willing to accept any job offer.
ANSWER: b

6. What is the unemployment rate?

a. the percentage of people in the economy who do NOT hold jobs
b. the percentage of the people in the labour force who do NOT have a job.
c. the number of people in the economy who have given up looking for employment
d. the number of people in the labour force without jobs
ANSWER: b

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7. Consider an economy made up of 100 people, 60 of whom hold jobs, 10 of whom are looking for work, and 15 of
whom are retired. How many people are in the labour force?
a. 30
b. 60
c. 70
d. 85
ANSWER: c

8. Consider an economy made up of 100 people, 60 of whom hold jobs, 10 of whom are looking for work, and 15 of
whom are retired. How many people are counted as unemployed?
a. 10
b. 15
c. 40
d. 90
ANSWER: a

9. When does the unemployment rate increase?

a. It increases whenever the number of persons classified as unemployed increases.
b. It increases whenever the number of unemployed increases relative to the size of the labour force.
c. It increases whenever the size of the labour force decreases.
d. It increases whenever the size of the labour force decreases and the number of unemployed decreases.
ANSWER: b

10. Consider an economy with an adult population of 100, 50 of whom hold jobs, 10 of whom are looking for work, and
15 of whom are retired. What is the labour force participation rate?
a. 10 percent
b. 40 percent
c. 50 percent
d. 60 percent
ANSWER: d

11. Suppose U = the number of adults who are unemployed, E = the number of adults who are employed, and NLF = the
number of adults NOT in the labour force. Which expression would equal the unemployment rate?
a. U/(E + NLF)
b. U/E
c. U/(U + E)
d. U/(E + NLF)
ANSWER: c

12. Suppose U = the number of adults who are unemployed, E = the number of adults who are employed, and NLF = the
number of adults NOT in the labour force. Which expression would equal the labour force participation rate?
a. E/(U + E)
b. U/(U + E + NLF)
c. E/(U + E + NLF)
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d. (U + E)/(U + E + NLF)
ANSWER: d

13. Which of the following is a discouraged worker?

a. one who is underqualified for his current job
b. one who dislikes his current job but is afraid to quit
c. one who drops out of the labour force because he CANNOT find a job
d. one who quits his job because the possibility of advancement is very low
ANSWER: c

14. Which of the following people would be classified as a discouraged worker?

a. a labour force member who has chosen early retirement because he dislikes his work or thinks the pay is too
low
b. a member of the non-institutional population who says he wants to be employed but is NOT searching for a
job
c. a member of the labour force who is looking for a job but CANNOT find one
d. any member of the population who is NOT working
ANSWER: b

15. Which of the following people would be counted as unemployed?

a. a completely retired naval officer
b. a full-time high-school student who does NOT have time for a job
c. a father of preschool children who does NOT want to work
d. a downhill ski instructor who looks for work only during the winter
ANSWER: d

16. Suppose that top government officials claim that “more people are working now than ever before.” What does this
mean?
a. The unemployment rate is lower now than ever before.
b. The number of unemployed people is lower now than ever before.
c. The number of people in the labour force is higher now than ever before.
d. The number of employed people is higher now than ever before.
ANSWER: d

17. Which of the following explains the labour force participation rate?
a. When workers become unemployed, the labour force participation rate declines.
b. When the unemployed become discouraged workers, the labour force participation rate declines.
c. When workers are NOT fully using their skills, the labour force participation rate decreases.
d. Since the 1950s the labour force participation rate of women has decreased in Canada.
ANSWER: b

18. Suppose the official unemployment rate is 10 percent. Which of the following can be concluded without question?
a. The same 10 percent of the people in the economy were out of work for the entire year.
b. One of every ten people in the labour force is currently unemployed.
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c. The same 10 percent of the people in the labour force were out of work for the entire year.
d. Every person in the labour force was out of work for 10 percent of the year.
ANSWER: b

19. Which of the following is NOT a way for a worker to become officially unemployed?
a. A worker quits his job to look for a better job in another part of the country.
b. A worker is fired from his job.
c. A worker begins looking for a job after being out of the labour force for five years.
d. A worker retires.
ANSWER: d

20. Which of the following people would be counted among the unemployed?
a. a new college graduate who sells newspaper advertising on a part-time basis while looking for other work
b. a new college graduate who sells newspaper advertising on a full-time basis while looking for other work
c. a new college graduate who sells newspaper advertising on a part-time basis but is NOT looking for other
work
d. a new college graduate who is NOT qualified for any of the jobs available in his small town
ANSWER: d

21. Which of the following people would be classified as unemployed?

a. a person who wants a job as a fashion model but CANNOT find work in that field
b. someone who quits a part-time job to attend school full time
c. someone who gives up looking for a job
d. a person who works part time and would rather work full time
ANSWER: a

22. What does an unemployment rate decrease mean?

a. The number of persons classified as unemployed increases.
b. The number of unemployed decreases relative to the size of the labour force.
c. The size of the population decreases and the number of persons classified as employed remains the same.
d. The size of the labour force decreases.
ANSWER: b

23. Which of the following characterizes the labour force participation rate for women in Canada?
a. It has fluctuated substantially both upward and downward since the 1950s.
b. It has increased significantly since the 1950s.
c. It has increased only very slightly since the 1950s.
d. It has stayed the same over the last 30 years.
ANSWER: b

24. Which of the following describes the labour force participation rates in Canada since the 1950s?
a. The rate for men has risen and the rate for women has risen.
b. The rate for women has fallen and the rate for men has risen.
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c. The rate for men has fallen and the rate for women has increased.
d. The rate for men has fallen and the rate for women has fallen.
ANSWER: c

25. How is the labour force participation rate calculated?

a. the number of people employed divided by the adult population
b. the number of people employed divided by the number of people in the labour force
c. the number of people in the labour force divided by the adult population
d. the number of people unemployed divided by the number of people in the labour force
ANSWER: c

26. Which of the following best describes what has occurred in Canada’s labour force since World War II?
a. The civilian labour force has decreased.
b. The number of unemployed persons has decreased.
c. The number of employed persons has decreased.
d. The labour force participation rate of women has increased.
ANSWER: d

27. Which term refers to workers who are overqualified for their current jobs or can find only part-time work?
a. unemployed
b. discouraged workers
c. NOT in the labour force
d. underemployed
ANSWER: d

28. Generally, the unemployment rate rises during a contraction. How is the unemployment rate generally affected during
an expansion?
a. It rises.
b. It falls.
c. It first rises, and then falls.
d. It stays the same.
ANSWER: b

29. How have the male and female labour force participation rates been affected since World War II?
a. The rate for males has increased and the rate for females has increased.
b. The rate for males has decreased and the rate for females has decreased.
c. The rate for males has increased and the rate for females has decreased.
d. The rate for males has decreased and the rate for females has increased.
ANSWER: d

30. Suppose that Danny, who has a Ph.D. in physics, is employed in a pizza restaurant because that is the only work he
can find. In terms of employment, how would Danny be classified?
a. as a discouraged worker
b. as underemployed
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Chapter 7 - Unemployment and Inflation

c. as NOT in the labour force
d. as unemployed
ANSWER: b

31. Suppose Rita is a recent college graduate who is still looking for her first job. In terms of employment, how would
Rita be classified?
a. as a discouraged worker
b. as underemployed
c. as unemployed
d. as NOT in the labour force
ANSWER: c

32. Suppose Kevin, who is an accountant, lost his job in the last recession but gave up looking for work after 12 months of
unsuccessful job searching. In terms of employment, how would Kevin be classified?
a. as a discouraged worker
b. as underemployed
c. as employed
d. as unemployed
ANSWER: a

33. Which one of the following categories of workers has a high unemployment rate?
a. professionals in general
b. attorneys
c. technical workers in general
d. auto workers
ANSWER: d

34. Which metropolitan area in Canada had the lowest unemployment rate in 2015?
a. Windsor, Ontario
b. Saint John, New Brunswick
c. Sherbrooke, Quebec
d. Kelowna, British Columbia
ANSWER: d

35. Sharon was being treated unfairly by her boss, so she stormed off the job and two weeks later she found another
position. What type of unemployment did Sharon experience for those two weeks?
a. cyclical
b. structural
c. seasonal
d. frictional
ANSWER: d

36. Juanita earned a B.A.Sc. in engineering and went to work for a defence contractor. When the government cut
spending, Juanita and 99 others were laid off. The only other business in the town is a grape-growing firm, but the firm
refuses to hire laid-off engineers, knowing they will leave at the first opportunity. What type of unemployment is Juanita
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experiencing?
a. cyclical
b. structural
c. seasonal
d. frictional
ANSWER: b

37. The only job Justin ever holds is preparing income tax forms at H&R Block from January 2 to April 15 each year. In
March, while he is still working, he sends his resume to prospective employers. In March, what would Justin be counted
as?
a. cyclically unemployed
b. structurally unemployed
c. frictionally unemployed
d. part of the labour force
ANSWER: d

38. Greg recently graduated from law school. Although Greg looked for a job last week, he has NOT found one. Which of
the following terms describes Greg?
a. frictionally unemployed
b. structurally unemployed
c. seasonally unemployed
d. a discouraged worker
ANSWER: a

39. What type of unemployment is a professional ski instructor in Canada most likely to experience?
a. frictional unemployment
b. structural unemployment
c. seasonal unemployment
d. cyclical unemployment
ANSWER: c

40. What does frictional unemployment refer to?

a. unemployment that results from a mismatch of skills
b. unemployment that results from taking the time to find the best job
c. unemployment that results from seasonal decreases in demand for labour
d. unemployment that results from a recession in the economy
ANSWER: b

41. What does seasonal unemployment refer to?

a. unemployment that results from a mismatch of skills
b. unemployment that results from taking the time to find the best job
c. unemployment that results from decreases in demand for labour at particular times of the year
d. unemployment that results from a recession in the economy
ANSWER: c
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42. What does structural unemployment refer to?

a. unemployment that results from being in the wrong geographical location
b. unemployment that results from taking the time to find the best job
c. unemployment that results from seasonal decreases in demand for labour
d. unemployment that results from a recession in the economy
ANSWER: a

43. What does cyclical unemployment result from?

a. a mismatch of skills
b. taking the time to find the best job
c. seasonal decreases in demand for labour
d. a recession in the economy
ANSWER: d

44. Jacqueline, a brilliant new Ph.D. in economics, has turned down many job offers because she hopes eventually to
teach at one of the top ten universities in her field. What type of unemployment is she experiencing?
a. frictional
b. structural
c. seasonal
d. cyclical
ANSWER: a

45. Jamal lost his job as a shipbuilder. The shipyard closed and never reopened, and so his very specialized skills were no
longer in demand. What type of unemployment did Jamal experience?
a. cyclical
b. structural
c. seasonal
d. frictional
ANSWER: b

46. In which of the following industries are workers least likely to suffer from cyclical unemployment?
a. new home construction
b. automobile manufacturing
c. carpet installation
d. education
ANSWER: d

47. What type of unemployment was experienced by most unemployed workers in Canada during the Great Depression?
a. cyclical
b. structural
c. seasonal
d. frictional
ANSWER: a
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48. What type of unemployment is the hardest to reduce?

a. cyclical
b. structural
c. voluntary
d. involuntary
ANSWER: b

49. What type of unemployment is most likely to help the economy become more efficient?
a. cyclical
b. structural
c. seasonal
d. frictional
ANSWER: d

50. Which type of unemployment is NOT included in Canada’s official monthly unemployment figures?
a. cyclical
b. structural
c. seasonal
d. frictional
ANSWER: c

51. What type of unemployment arises from mismatch of skills?

a. frictional
b. structural
c. seasonal
d. cyclical
ANSWER: b

52. What does structural unemployment result from?

a. a mismatch of skills
b. monetary cost and the time it takes to find the best job
c. seasonal decreases in demand for labour
d. prolonged declines in business activity
ANSWER: a

53. What does cyclical unemployment result from?

a. a mismatch of skills
b. monetary cost and the time it takes to find the best job
c. seasonal decreases in demand for labour
d. prolonged declines in business activity
ANSWER: d

54. Suppose the official unemployment rate increases due to a downturn in the overall economy. What type of
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unemployment would be responsible for this increase?
a. seasonal
b. cyclical
c. structural
d. frictional
ANSWER: b

55. Suppose the official unemployment rate in January is higher than the December level because the Christmas shopping
rush is over. What type of unemployment would be responsible for this increase?
a. seasonal
b. cyclical
c. structural
d. frictional
ANSWER: a

56. Suppose the official unemployment rate in March is higher than the February level because of sluggish sales in the
auto industry. What type of unemployment would be responsible for this increase?
a. seasonal
b. cyclical
c. structural
d. frictional
ANSWER: b

57. Suppose Janice is laid off from her office job because new technology has reduced the need for staff to handle
customer-service inquiries. What type of unemployment is Janice experiencing?
a. seasonal
b. cyclical
c. structural
d. frictional
ANSWER: c

58. Which of the following is a cause of seasonal unemployment?

a. people having unrealistic expectations about the availability of employment
b. people being in the wrong geographical location
c. people taking a long time to find the best job
d. firms having decreased demand for labour at certain times of the year
ANSWER: d

59. Which of the following is most likely to reduce structural unemployment?

a. a reduction in wage rates
b. increasing efficiency of the job search by providing applicants with better information about local job
openings
c. retraining workers in marketable skills
d. reducing the cost of job loss through enhanced unemployment compensation

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ANSWER: c

60. What is the term for workers who are temporarily unemployed but who normally find jobs quickly?
a. frictionally unemployed
b. cyclically unemployed
c. seasonally unemployed
d. structurally unemployed
ANSWER: a

61. What type of unemployment is likely to increase the most during a recession?
a. frictional unemployment
b. seasonal unemployment
c. structural unemployment
d. cyclical unemployment
ANSWER: d

62. Joel just graduated from college and is looking for a job. How would economists classify Joel?
a. as cyclically unemployed
b. as structurally unemployed
c. as seasonally unemployed
d. as frictionally unemployed
ANSWER: d

63. Suppose tastes and preferences change. As a result, newspaper journalists are laid off. What type of unemployment
would this be classified as?
a. structural unemployment
b. frictional unemployment
c. seasonal unemployment
d. cyclical unemployment
ANSWER: a

64. Which of the following is the best example of a frictionally unemployed worker?
a. a person who is laid off during a recessionary period in the economy
b. a person who is in the process of voluntarily switching jobs
c. a person who is discouraged and NOT actively seeking work
d. a person who CANNOT find a job that matches with his skills
ANSWER: b

65. When the economy is at full employment, what types of unemployment may exist?
a. seasonal and structural
b. structural and frictional
c. seasonal and cyclical
d. frictional and cyclical
ANSWER: b
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66. Under which of the following conditions does full employment exist?
a. when there is cyclical unemployment, but no frictional, structural, or seasonal unemployment
b. when the unemployment rate is zero
c. when everyone in the labour force has a job
d. when there is no cyclical unemployment, but there is some frictional, structural, and seasonal unemployment
ANSWER: d

67. Which of the following is NOT consistent with full employment?

a. seasonal unemployment
b. structural unemployment
c. cyclical unemployment
d. frictional unemployment
ANSWER: c

68. Why is full employment considered a major economic goal?

a. because specialization is NOT possible without full employment
b. because growth can occur only when there is full employment
c. because the opportunity cost of unemployment is lost production
d. because inflation will be lower when full employment is achieved
ANSWER: c

69. Suppose unemployment benefits are increased. Which of the following is the most likely outcome of the increase?
a. An unemployed person will have less incentive to look for work.
b. The direct cost of being unemployed will increase.
c. The need to accept the first available job after becoming unemployed will increase.
d. It will be more difficult for an unemployed person to take a longer time to search for a job most appropriate to
his skill level.
ANSWER: a

70. Which one of the following people will most likely qualify for unemployment compensation benefits?
a. a new college graduate who CANNOT find work despite a desperate job search
b. an unemployed coal miner who has been receiving benefits for the past six months
c. a former retail clerk who quit her job because the boss was too demanding
d. a spot welder who has just gotten his layoff notice in the mail after ten years of continuous employment
ANSWER: d

71. Why does the official unemployment rate disguise the extent of the unemployment problem?
a. because retired persons are NOT counted as unemployed
b. because full-time students are NOT counted as unemployed
c. because discouraged workers are counted as unemployed
d. because people who are overqualified for their current jobs are NOT considered unemployed
ANSWER: d

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72. Which of the following is excluded from calculations of the official unemployment rate, leading to the true extent of
unemployment being understated?
a. retired persons
b. students
c. people who do NOT want to work
d. discouraged workers
ANSWER: d

73. Suppose the total population is 150 million, the labour force is 100 million, and 94 million workers are employed.
What is the unemployment rate?
a. 4 percent
b. 8 percent
c. 6 percent
d. 10 percent
ANSWER: c

74. Which of the following people are considered underemployed?

a. people who are seasonally unemployed
b. people who work full time although they would rather work part time
c. people who work in technically demanding jobs
d. people who work part time
ANSWER: d

75. The unemployment rate does NOT measure all unemployed people. Which groups are NOT counted as unemployed in
the official unemployment statistics?
a. the underemployed and the cyclically unemployed
b. the underemployed and the discouraged workers
c. the frictionally unemployed and the structurally unemployed
d. the cyclically unemployed and the frictionally unemployed
ANSWER: b

76. The official unemployment rate would be higher if it included the existence of hidden unemployment. Who falls into
this category?
a. people who are on unemployment compensation
b. people who work part time but prefer full-time work
c. people who have voluntarily retired
d. people who are unemployed but are looking for work
ANSWER: b

77. Which of the following factors makes the official unemployment rate an overstatement of the actual level of
unemployment in the economy?
a. exclusion of discouraged workers
b. inclusion of those working only part time
c. exclusion of those who work at a family business

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d. inclusion of those who pretend to look for work in order to qualify for welfare programs
ANSWER: d

78. What problem with the official unemployment rate is due to the way discouraged workers and part-time employment
are measured?
a. The official unemployment rate overstates the unemployment problem.
b. The official unemployment rate understates the unemployment problem.
c. The official unemployment rate overstates the size of the labour force.
d. The official unemployment rate understates the size of the labour force.
ANSWER: b

79. What is the definition of inflation?

a. a reduction in everyone’s standard of living
b. a rise in the real prices of all goods and services
c. a general and continuing rise in the money prices of goods and services
d. a continuing rise in everyone’s standard of living
ANSWER: c

80. Suppose the inflation rate is higher than expected. Which one of the following groups would be most likely to gain?
a. borrowers
b. lenders
c. persons on fixed incomes
d. workers under contract without a cost-of-living adjustment
ANSWER: a

81. What does deflation refer to?

a. decreasing relative prices
b. a decreasing price level
c. a slowing down of the rate of inflation
d. a slowing down of the rate of relative price decreases
ANSWER: b

82. What does hyperinflation refer to?

a. extremely rapidly rising prices
b. extremely rapidly falling prices
c. an extremely high price level
d. an extremely low price level
ANSWER: a

83. During the 1970s, inflation occurred because OPEC increased oil prices. Which term is used to refer to the inflation
experienced at this time?
a. demand-pull inflation
b. hyperinflation
c. cost-push inflation
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d. cyclical inflation
ANSWER: c

84. Suppose the aggregate demand curve shifts rightward, causing inflation. What type of inflation is this?
a. demand deficient inflation
b. cost-push inflation
c. demand-pull inflation
d. WAGE price spiral inflation
ANSWER: c

85. Suppose the aggregate supply curve shifts leftward, causing inflation, what type of inflation is this called?
a. demand-push inflation
b. cost-push inflation
c. demand-pull inflation
d. cost-pull inflation
ANSWER: b

86. Which of the following can cause inflation?

a. increases in aggregate demand only
b. increases in aggregate supply only
c. increases in aggregate supply or decreases in aggregate demand
d. increases in aggregate demand or decreases in aggregate supply
ANSWER: d

87. Which of the following would likely lead to the most inflation?
a. if aggregate demand increases and aggregate supply increases
b. if aggregate demand decreases and aggregate supply decreases
c. if aggregate demand increases and aggregate supply decreases
d. if aggregate demand decreases and aggregate supply increases
ANSWER: c

88. What is the difference between demand-pull inflation and cost-push inflation?
a. Cost-push inflation is caused by shifts of the aggregate demand curve, but demand-pull inflation is caused by
cyclical activity in the economy.
b. Demand-pull inflation is caused by shifts of the aggregate demand curve, but cost-push inflation is caused by
shifts of the aggregate supply curve.
c. Demand-pull inflation is caused by government deficit spending, but cost-push inflation is caused by firms.
d. Demand-pull inflation is caused by foreign demand, but cost-push inflation is caused by domestic production
problems.
ANSWER: b

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89. Refer to the graph in the exhibit. What type of inflation is illustrated?
a. cost-pull inflation
b. cost-push inflation
c. demand-push inflation
d. demand-pull inflation
ANSWER: d

90. Which of the following is demand-pull inflation associated with?

a. decreasing aggregate demand and lower unemployment
b. increasing aggregate demand and lower unemployment
c. decreasing aggregate demand and greater unemployment
d. increasing aggregate demand and greater unemployment
ANSWER: b

91. Which of the following is cost-push inflation associated with?

a. It occurs when the aggregate demand curve shifts rightward.
b. It occurs when the aggregate supply curve shifts rightward.
c. It results in a decrease in the unemployment rate.
d. It results in a movement along the aggregate demand curve.
ANSWER: d

92. Which of the following was a result of increased oil prices during the 1970s?
a. Aggregate demand increased, causing demand-pull inflation.
b. Aggregate demand decreased, causing cost-push inflation.
c. Aggregate supply increased, causing cost-push inflation.
d. Aggregate supply decreased, causing cost-push inflation.
ANSWER: d

93. What causes demand-pull inflation?

a. an inward shift of the aggregate demand curve
b. an inward shift of the aggregate supply curve

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c. an outward shift of the aggregate demand curve
d. an outward shift of the aggregate supply curve
ANSWER: c

94. What typically causes cost-push inflation?

a. an outward shift of the demand curve
b. an inward shift of the demand curve
c. an outward shift of the supply curve
d. an inward shift of the supply curve
ANSWER: d

95. Refer to the graph in the exhibit. What type of inflation is illustrated?
a. cost-pull inflation
b. cost-push inflation
c. demand-push inflation
d. demand-pull inflation
ANSWER: b

96. Which period in Canadian economic history was characterized by deflation?

a. 1930 to 1933
b. 1947
c. 1975 to 1980
d. 1980 to 1989
ANSWER: b

97. Since the end of World War II, how has the Canadian price level changed?
a. It has increased more than twelvefold.
b. It has increased by 50 percent.
c. It has increased by an average of 10 percent each year.
d. It has increased and decreased with equal regularity.
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ANSWER: a

98. Suppose the price levels in four successive years are 100, 120, 133, and 140. Which of the following is the economy
experiencing?
a. hyperinflation
b. deflation
c. reflation
d. disinflation
ANSWER: d

99. Which of the following would allow a worker to be least hurt by inflation?
a. The worker anticipates inflation and increases his savings.
b. The worker has a cost-of-living adjustment clause in his employment contract.
c. The price level increases but at a decreasing rate.
d. The worker has fixed annual increases in wages and benefits in his employment contract.
ANSWER: b

100. Suppose Corrine received a 3 percent increase in her nominal wage. Over the year, inflation ran about 6 percent.
Which of the following describes how Corrine’s nominal and real wages were affected?
a. Corrine’s nominal wage increased and her real wage decreased.
b. Corrine’s nominal wage decreased and her real wage increased.
c. Corrine’s nominal wage decreased and her real wage decreased.
d. Corrine’s nominal wage increased and her real wage increased.
ANSWER: a

101. Suppose Evelyn received a 5 percent increase in her nominal wage. Over the year, inflation ran about 2 percent.
Which of the following describes how Evelyn’s nominal and real wages were affected?
a. Evelyn’s nominal wage increased and her real wage decreased.
b. Evelyn’s nominal wage decreased and her real wage increased.
c. Evelyn’s nominal wage decreased and her real wage decreased.
d. Evelyn’s nominal wage increased and her real wage increased.
ANSWER: d

102. Suppose Frank received a 5 percent increase in his nominal wage. Over the year, inflation ran about 2 percent. Which
of the following describes how Frank’s nominal and real wages were affected?
a. Frank’s nominal wage increased and his real wage increased.
b. Frank’s nominal wage decreased and his real wage decreased.
c. Frank’s nominal wage increased and his real wage decreased.
d. Franks’ nominal wage decreased and his real wage increased.
ANSWER: a

103. Suppose Flora received a 4 percent increase in her nominal wage. Over the year, inflation runs about 7 percent.
Which of the following describes how Flora’s nominal and real wages were affected?
a. Flora’s nominal wage decreased and her real wage decreased.
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b. Flora’s nominal wage increased and her real wage increased.
c. Flora’s nominal wage decreased and her real wage increased.
d. Flora’s nominal wage increased and her real wage decreased.
ANSWER: d

104. What does it mean when a worker experiences a decrease in real wages?
a. The worker’s purchasing power declines.
b. The worker’s nominal wage declines.
c. The worker’s after-tax nominal wage declines.
d. The worker’s nominal wage rises.
ANSWER: a

105. What does it mean when a worker experiences an increase in real wages?
a. The worker’s purchasing power rises.
b. The worker’s nominal wage declines.
c. The worker’s after-tax nominal wage declines.
d. The worker’s nominal wage rises.
ANSWER: a

106. Suppose the inflation rate is 5 percent, and Randolph receives a wage increase of 5 percent. How will Randolph’s
nominal and real incomes be affected?
a. His nominal income and his real income will increase by 5 percent.
b. His nominal income will increase, but his real income declines.
c. His nominal income and his real income will decrease by 5 percent.
d. His nominal income will increase by 5 percent, but his real income will stay the same.
ANSWER: d

107. Which of the following best describes how a person’s perception of future inflation will affect the nominal interest
rate for borrowers and lenders?
a. the higher you think the inflation rate is likely to be, the higher the nominal interest rate you will offer as a
borrower, and the higher the rate you will want as a lender
b. the higher you think the inflation rate is likely to be, the higher the nominal interest rate you will offer as a
borrower, and the lower the rate you will want as a lender
c. the higher you think the inflation rate is likely to be, the lower the nominal interest rate you will offer as a
borrower, and the higher the real interest rate you will want as a lender
d. the higher you think the inflation rate is likely to be, the lower the nominal interest rate you will offer as a
borrower, and the lower the rate you will want as a lender
ANSWER: a

108. Suppose the expected inflation rate is 4 percent and the nominal interest rate is 9 percent. What is the expected real
interest rate?
a. 13 percent
b. 9 percent
c. 5 percent
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d. –5 percent
ANSWER: c

109. How is perception about the future inflation rate likely to affect labour markets?
a. the higher the anticipated inflation rate, the more workers will ask for in wages, and the more firms will agree
to pay to workers
b. the higher the anticipated inflation rate, the more workers will ask for in wages, and the less firms will agree to
pay to workers
c. the higher the anticipated inflation rate, the less workers will ask for in wages, and the less firms will agree to
pay to workers
d. the higher the anticipated inflation rate, the higher the real wage increases firms will offer to their workers
ANSWER: a

110. What happens in an economy during periods when the inflation rate fluctuates widely?
a. All relative prices increase at the same rate, leaving money prices constant.
b. All money prices rise at the same rate, causing relative prices to increase.
c. Economic efficiency increases because decision makers pay closer attention to changes in money prices.
d. Uncertainty about changes in relative prices causes a decrease in economic efficiency.
ANSWER: d

111. Suppose future price changes are perfectly anticipated by both borrowers and lenders. If the price level changed, how
would the future real interest rate be affected?
a. It would increase.
b. It would decrease.
c. It would decrease by the amount of the price increase.
d. It would remain the same.
ANSWER: d

112. Which of the following best describes what occurs in an economy during periods of high inflation?
a. People want to hold as much money as possible.
b. The purchasing power of money decreases.
c. Few people want to work and earn income.
d. Low nominal interest rates are likely to result.
ANSWER: b

113. Some economists have argued that inflation during the 1970s contributed to Canada’s relatively slow growth rate
during that period. What is the basis for this view?
a. Inflation usually lowers employment, thus inflation slowed growth at that time.
b. The inflation was anticipated, which was particularly harmful because cost-of-living increases were built into
wage settlements, which only worsened the problem.
c. High and variable inflation rates increased uncertainty, which made business decisions more difficult.
d. Lenders were less interested in making short-term loans than in making long-term loans.
ANSWER: c

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114. During inflationary times, which of the following is NOT likely occur?
a. People will change their expectations about the inflation rate.
b. Workers will try to get increases in nominal wages.
c. People will be willing to lend money for longer periods.
d. People will buy physical assets as a hedge against rising prices.
ANSWER: c

115. What happens to money in times of rapid inflation?

a. Money loses its use as a store of value.
b. Money becomes an attractive store of wealth.
c. Money increases in value.
d. Money becomes more attractive to save.
ANSWER: a

116. Who is most likely to be penalized by unanticipated inflation?

a. people who are saving
b. people who are borrowing
c. governments
d. people who are in high-growth industries in which wages are growing faster than prices
ANSWER: a

117. What does the consumer price index measure?

a. the cost of all consumer goods and services produced in the Canadian economy
b. the cost of all consumer goods produced in the Canadian economy
c. the cost of a fixed market basket of consumer goods and services produced in the Canadian economy
d. the cost of a fixed market basket of producer goods and services
ANSWER: c

118. Which country experienced deflation for the first few years of the 21st century?
a. Canada
b. France
c. Germany
d. Japan
ANSWER: d

119. Which of the following is likely to occur in a period of high inflation?

a. People will want to hold as much money as possible.
b. The purchasing power of money will increase.
c. No one will want to work and earn income.
d. Nominal interest rates will be high.
ANSWER: d

120. Suppose the nominal interest rate is 5 percent and there is no inflation. What is the real interest rate?

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a. >5 percent
b. <5 percent
c. 5 percent
d. exactly 0 percent
ANSWER: c

121. Suppose the nominal interest rate is 6 percent, and the inflation rate is 4 percent. What is the real interest rate?
a. 10 percent
b. 2 percent
c. –2 percent
d. –10 percent
ANSWER: b

122. Suppose two parties to a loan contract agree that the lender should earn an 8 percent increase in purchasing power as
a result of a loan. The inflation rate is 5 percent. What is the nominal interest rate?
a. 13 percent
b. 8 percent
c. 5 percent
d. 3 percent
ANSWER: a

123. Suppose the interest rate increases. Other things constant, how will the loanable funds market be affected?
a. The supply of loanable funds curve will shift to the left.
b. The supply of loanable funds curve will shift to the right.
c. The quantity of loanable funds supplied will increase.
d. The quantity of loanable funds demanded will increase.
ANSWER: c

124. Suppose the interest rate decreases. Other things constant, how will the loanable funds market be affected?
a. The supply of loanable funds curve will shift to the left.
b. The supply of loanable funds curve will shift to the right.
c. The quantity of loanable funds demanded will decrease.
d. The quantity of loanable funds supplied will decrease.
ANSWER: d

125. Suppose the interest rate decreases. Other things constant, how will the loanable funds market be affected?
a. The demand for loanable funds curve will shift to the right.
b. The demand for loanable funds curve will shift to the left.
c. The quantity of loanable funds demanded will increase.
d. The quantity of loanable funds supplied will increase.
ANSWER: c

126. Suppose the interest rate increases. Other things constant, how will the loanable funds market be affected?
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a. The demand for loanable funds curve will shift to the right.
b. The demand for loanable funds curve will shift to the left.
c. The quantity of loanable funds supplied will decrease.
d. The quantity of loanable funds demanded will decrease.
ANSWER: d

127. Unanticipated inflation redistributes income across groups in society. Which of the following people are among the
winners?
a. people who loan money
b. people on fixed incomes
c. people who are small savers
d. people who borrow money at fixed interest rates
ANSWER: d

128. Raul borrowed $1,000 from Marta for a year and agreed to repay her $1,050 at the end of the year. If the inflation
rate was 3 percent, what is the real rate of interest Marta received?
a. 10 percent
b. 5 percent
c. 3 percent
d. 2 percent
ANSWER: d

129. Tony loaned $1,000 to Dave for one year, with the understanding that Dave would repay $1,070 to Tony. If the
actual inflation rate was 7 percent, what was the real rate of interest Tony received?
a. 14 percent
b. 7 percent
c. 4 percent
d. 0 percent
ANSWER: d

130. Which of the following events would be the most likely to cause the nominal interest rate to fall?
a. if the supply of loanable funds increases and the demand for loanable funds increases
b. if the supply of loanable funds decreases and the demand for loanable funds decreases
c. if the supply of loanable funds increases and the demand for loanable funds decreases
d. if the supply of loanable funds decreases and the demand for loanable funds increases
ANSWER: c

131. Which of the following is a way of expressing the real interest rate?
a. as the nominal interest rate minus the real interest rate
b. as the inflation rate minus the nominal interest rate
c. as the nominal interest rate minus the inflation rate
d. as the inflation rate minus the real interest rate
ANSWER: c

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132. How do inflation and real income relate to each other?
a. Inflation always reduces real income.
b. Inflation reduces the real income of workers when wages increase more than prices do.
c. Inflation reduces the real income of workers when wages increase less than prices do.
d. Inflation increases the real income of workers only when wages increase less than prices do.
ANSWER: b

133. Why does unanticipated inflation create problems for society?

a. because it increases the wealth of people who hold cash
b. because it promotes social cooperation by encouraging self-restraint
c. because it reduces the desire to plan and the complexity of planning
d. because it redistributes wealth and income
ANSWER: d

134. Why is unanticipated inflation usually viewed as undesirable?

a. because it reduces everyone’s nominal wages
b. because it redistributes income and wealth
c. because it is accompanied by reductions in real GDP
d. because it usually results in the public sector growing less rapidly than the private sector
ANSWER: b

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