Chap 26

Chapter 26
Unemployment and Its Natural Rate
1. The natural rate of unemployment is

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

a. the relation between unemployment and a worker’s changing level of experienc
e.
b. year-to-year fluctuations of unemployment around its natural rate.
c. long-term trends in unemployment.
d. None of the above are correct.
nemployment around its natural
3. Cyclical unemployment is closely associated with
a. short-run ups and downs of the economy.
b. long-term economic growth.
c. fluctuations in the natural rate of unemployment.
ANSWER: a. short-run ups and downs of the economy.
4. The natural rate of unemployment
a. is a constant.
b. is the desirable rate of unemployment.
c. is impervious to economic policy.
ANSWER: d. None of the above are correct.
5. Data on unemployment is reported
a. weekly.
b. monthly.
c. quarterly.
d. yearly.
ANSWER: b. monthly. CTIVE: 1 RANDOM: Y
6. The BLS produces data on
a. unemployment.
b. types of employment.
c. length of the average workweek.
d. All of the above are correct.
2 Chapter 26/Unemployment and Its Natural Rate
ANSWER: d. All of the above are correct.

7. Which of the following is incorrect?
a. The Bureau of Labor Statistics gathers data on unemployment and employment.
b. The unemployment rates are computed according to number of unemployment in
surance claims filed.
c. Each adult included in the unemployment statistics is classified as employed, un
employed, or not in the labor force.
d. Unemployment numbers include people aged sixteen and older.
ANSWER: b. The unemployment rates are computed according to number of
8. Unemployment data is collected

a. from firms and unemployment insurance claims.
b. through a regular survey of about 6,000 households.
c. through a regular survey of about 60,000 households.
ANSWER: c. through a regular survey of about 60,000
9. Which list includes all the categories into which the BLS divides the adult population?
a. employed or unemployed
b. discouraged workers, employed, or unemployed
c. employed, unemployed, or not in the labor force
d. discouraged workers, employed, or not in the labor force ANSWER: c. employ
ed, unemployed, or not in the labor force TYPE: M KEY1: D Y
10. Which of the following would be counted as unemployed according to official statistic
s?
a. Tim, who worked, but worked only 35 hours last week
b. Mary, who is waiting for her new job to start
c. Bev, who neither has a job nor is looking for one
d. None of the above would be counted as unemployed.
ANSWER: b. Mary, who is waiting for her new job to start
11. Which of the following would be counted as unemployed according to official statistic
s?
a. Gary, who has retired and is not looking for work
b. Brian, a full time student who is not looking for work
c. Nancy, who is on temporary layoff
ANSWER: c. Nancy, who is on temporary layoff
12. Who would not be included in the labor force?
a. Mike, who has retired and is not looking for work
b. Jay, who is on temporary layoff
c. Jane, who does not have a job, but has applied for several in the last week
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Chapter 26/Unemployment and Its Natural Rate 3
d. None of the above are included in the labor force. ANSWER: a. Mike, who has
retired and is not looking for work TYPE: M KEY1: D SECTION: 1 OBJECTI
VE: 1 RANDOM: Y
13. Who would be included in the labor force?

a. Bruce, a full-time student not looking for work
b. Holly, an unpaid homemaker
c. Dave, who does not have a job, but is looking for work
d. None of the above are included in the labor force. ANSWER: c. Dave, who doe
s not have a job, but is looking for work
14. Who would be included in the labor force?
a. Karen, who works most of the week in a steel factory
b. Beth, who is waiting for her new job at the bank to start
c. Dave, who does not have a job, but is looking for work
d. All of the above are included in the labor force. ANSWER: d. All of the above
are included in the labor force.
15. Which of the following correctly ranks categories from largest to smallest according to
recent U.S. values?
a. employed, not in labor force, unemployed
b. employed, unemployed, not in labor force
c. not in labor force, employed, unemployed
d. not in labor force, unemployed, employed
ANSWER: a. employed, not in labor force, unemployed.
16. To be counted as unemployed, a person must
a. be in the labor force.
b. be age 16 or older.
c. not be working.

17. A college student who is not working or looking for a job is counted as
a. unemployed and in the labor force.
b. unemployed, but not in the labor force.
c. employed and in the labor force.
d. neither employed nor part of the labor force. A
NSWER: d. neither employed nor part of the labor force.

18. Barb, a homemaker who works as a volunteer, is counted as
a. employed.
b. unemployed.
c. not in the labor force.
d.Both b and c are correct.

ANSWER: c. not in the labor force.
19. Don has graduated from college and is not working, but has taken a job that will start n
ext month. This week, Don is classified as
a. employed.
b. unemployed.
c. not in the labor force.
d. Both b and c are correct.
ANSWER: b. unemployed.
20. The BLS defines the unemployment rate as
a. the percentage of those unemployed relative to the percentage employed.
b. the percentage of the labor force that is unemployed.
c. the percentage of the adult population that is unemployed.
d. the amount of unemployment compensation paid per person, per week.
ANSWER: b. the percentage of the labor force that is unemployed.
21. Which of the following equations is correct?
a. Labor force = number of employed.
b. Labor force = population - number of unemployed.
c.Unemployment Rate = (number of unemployed ÷ adult population) x 100.
d. Unemployment Rate = (number of unemployed ÷ labor force) x 100.
ANSWER: d. Unemployment Rate = (number of unemployed ÷ labor force) x 100.
22. The labor-force participation rate
a. equals 1 minus the unemployment rate.
b. measures the percentage of the total adult population that is in the labor force.
c. measures the percentage of the total adult population that is employed.
d. measures the percentage of the labor force that is employed.
ANSWER: b. measures the percentage of the adult population that is in the labor
23. The labor-force participation rate is defined as follows:

a. (Labor Force ÷ Adult Population) x 100.
b. (Adult Population ÷ Labor Force) x 100.
c. (Employed ÷ Adult Population) x 100.
d. (Employed ÷ Labor Force) x 100.
ANSWER: a. (Labor Force ÷ Adult Population) x 100.
24. A few years ago, based on concepts similar to those used to estimate U.S. employment
figures, the Canadian adult noninstitutionalized population was 21.4 million, the labor f
orce was 14 million, and the number of people employed was 12.4 million. According t
o these numbers, the Canadian labor-force participation rate and unemployment rate we
re about
a. 81 percent and 7.5 percent.
b. 65 percent and 7.5 percent.
c. 65 percent and 11.4 percent.

d. 58 percent and 13 percent.
25. The BLS recently reported that there were 45.06 million people over age 16 who had at
least a bachelor’s degree. Of this number 36.21 million were in the labor force and 35.
54 were employed. What was the labor-force participation rate and the unemployment
rate for this group?
a. about 98 percent and 1.49 percent
b. about 80 percent and 1.85 percent
c. about 79 percent and 1.89 percent
d. None of the above is correct.
ANSWER: b. about 80 percent and 1.85 percent. : Y
26. Rick loses his job and immediately begins looking for another. Ceteris paribus,
a. the u-rate is unaffected, and the labor-force participation rate increases.
b. the u- rate decreases, and the labor-force participation rate is unaffected.
c. the u-rate increases, and the labor-force participation rate decreases.
d. the u-rate increases, and the labor-force participation rate is unaffected. ANSWE
R: d. the unemployment rate increases, and the labor-force
27. Kay loses her job and decides to sit around home for a few months. Ceteris paribus,
a. the unemployment rate is unaffected, and the labor-force participation rate increa
ses.
b. the unemployment rate increases, and the labor-force participation rate decrease
s.
c. the unemployment rate increases, and the labor-force participation rate is unaffec
ted.
d. the unemployment rate increases, and the labor-force participation rate increases.
nemployment rate increases, and the labor-force
28. Ann has just finished school and is looking for a job, but has not yet found one. Result,
a. the unemployment rate is unaffected, and the labor-force participation rate increa
ses.
b. the unemployment rate increases, and the labor-force participation rate decrease
s.
ted.
ANSWER: d. the unemployment rate increases, and the labor-force es.

29. Jeff has just finished school, but has not yet begun to look for a job. As a result,
a. the unemployment rate is unaffected, and the labor-force participation rate is una
ffected
b.the unemployment rate increases, and the labor-force participation rate decrease
s.
ted.
the labor-force participation rate is
30. Which group has the highest labor-force participation rate?
a. black females
b. white females
c. white males
d. There are no significant differences in participation rates across these groups.
ANSWER: c. white males
31. Among teenagers, which group has the highest unemployment rate?
a. black females
b. black males
c. white males
d. There are no significant differences in unemployment rates across these groups.
ANSWER: b. black males
32. Which of the following correctly lists teenage groups in order of unemployment rates fr
om highest to lowest?
a. black females, white females, white males.
b. black females, white males, white females.
c. white males, black females, white females.
d. white males, white females, black females.
ANSWER: a. black females, white females, white males.
33. Which of the following is correct for people ages 20 and over?
a. Women have lower rates of labor-force participation and higher rates of unemplo
yment compared to those of men.
b. Women have lower rates of labor-force participation and similar unemployment r
ates compared to those of men.
c. Men have lower rates of labor-force participation and similar unemployment rate
s compared to women.
d. Men have lower rates of labor-force participation and higher rates of unemploym
ent than do women.
ANSWER: b. Women have lower rates of labor-force participation and similar
34. Which of the following is correct for people ages 20 and over?
a. Blacks have similar rates of labor-force participation and lower unemployment r
ates than those of whites.
b. Blacks have similar rates of labor-force participation and higher unemployment r
c. Blacks have higher rates of labor-force participation and lower unemployment ra

tes than those of whites.
d. Blacks have higher rates of labor-force participation and higher unemployment r
ANSWER: b. Blacks have similar rates of labor-force participation and higher unemployme
nt rates than those of whites.
35. Which of the following is correct?
a. Teenagers have higher labor-force participation rates and higher unemployment r
ates than do adults.
b. Teenagers have higher labor-force participation rates and lower unemployment r
c. Teenagers have lower labor-force participation rates and lower unemployment ra
tes than do adults.
d. Teenagers have lower labor-force participation rates and higher unemployment r
ANSWER: d. Teenagers have lower labor-force participation rates and higher
36. The labor-force participation rate of the U.S. adult population (ages 16 and over) is abo
ut
a. 35 percent.
b. 50 percent.
c. 65 percent.
d. 80 percent.
ANSWER: c. 65 percent.
37. The labor-force participation rate of U.S. teenagers (ages 16 to 19) is about
a. 35 percent.
b. 50 percent.
c. 65 percent.
d. 80 percent.
ANSWER: b. 50 percent.
38. In the United States in recent years, the unemployment rate of blacks has been
a. less than that of whites.
b. about the same as that of whites.
c. about 50% higher than that of whites.
d. more than double that of whites.
ANSWER: d. more than double that of whites.
39. In the United States in recent years, the unemployment rate among teenagers has been
a. less than that of people ages 20 and over.
b. about the same as that of people ages 20 and over.
c. about twice that of people ages 20 and over.
d. more than three times that of people ages 20 and over. ANSWER: d. more than
40. A rough estimate of the natural rate of unemployment is

a. 1.5 percent.
b. 3 percent.
c. 5.5 percent.
d. 7 percent.
ANSWER: c. 5.5 percent.
41. Since World War II, the labor-force participation rate
a. has increased for both men and women.
b. has decreased for both men and women.
c. increased for women and decreased for men.
d. decreased for women and increased for men.
ANSWER: c. increased for women and decreased for men.
42. Just after World War II, the labor-force participation rate of women was
a. about 1/3 and currently is about 1/2.
b. about 1/3 and currently is about 3/5.
c. about 1/2 and currently is about 3/5.
d. about 3/5 and currently is about 1/2.
ANSWER: b. about 1/3 and currently is about 3/5. 1 RANDOM: Y
43. Just after World War II, the labor-force participation rate of men was
a. about 3/5 and currently is about 3/4.
b. about 3/4 and currently is about 9/10.
c. about 3/4 and currently is about 3/5.
d. about 9/10 and currently is about 3/4.
ANSWER: d. about 9/10 and currently is about 3/4.
44. The decrease in labor-force participation rates among U.S. men since World War II can
be attributed to
a. longer lives, laws that prevent mandatory retirement, and an increase in stay-at-
home dads.
b. better unemployment insurance, laws that prevent mandatory retirement, and law
s that prevent age discrimination in hiring.
c. easier job searches, better training, and laws that prevent mandatory retirement a
nd age discrimination in hiring.
d. longer schooling, an increase in stay-at-home dads, and earlier retirement and lo
nger lives. ANSWER: d. longer schooling, an increase in stay-at-home dads, an
d earlier retirement and longer lives.
45.If an unemployed person quits looking for work, ceteris paribus,
a. the unemployment rate decreases.
b. the unemployment rate increases.
c. the size of the labor force falls.
d. Both a and c are correct.
ANSWER: d. Both a and c are correct
46. Recent entrants account for about

a. 1/5 of those who are unemployed.
b. 1/4 of those who are unemployed.
c. 1/3 of those who are unemployed.
d. 1/2 of those who are unemployed.
ANSWER: c. 1/3 of those who are unemployed.
47. Spells of unemployment end about
a. 1/5 of the time with the person leaving the labor force.
b. 1/4 of the time with the person leaving the labor force.
c. 1/3 of the time with the person leaving the labor force.
d. 1/2 of the time with the person leaving the labor force.
ANSWER: d. 1/2 of the:

48. Which of the following statements is correct?
a. Some people who are employed or who are not making serious effort to find wor
k will report themselves as unemployed.
b. Some people who want to find work will be counted as out of the labor force in t
he official statistics.
c. Both a and b are correct.
ANSWER: c. Both a and b are correct.

49. Suppose that some people report themselves as unemployed when, in fact, they are wor
king in the underground economy. If these persons were counted as employed,
a. both the unemployment rate and labor-force participation rate would be higher.
b. both the unemployment rate and labor-force participation rate would be lower.
c. the unemployment rate would be higher and the labor-force participation rate wo
uld be lower.

50. Suppose that some people are counted as unemployed when, in fact, to maintain unemp
loyment compensation they search for work at places where they are unlikely to be hire
d. If they were counted as out of the labor force instead of as unemployed,
b. both the unemployment rate and labor-force participation rate would be lower.
c. the unemployment rate would be lower and the labor-force participation rate wo
uld be higher.
ANSWER: b. both the unemployment rate and labor-force participation rate would be lowe
r.
51. Some people are counted as out of the labor force because they make no serious effort t
o look for work. However, some of these people may want to work even though they ar
e too discouraged to make serious effort to look for work. If these persons were counte
d as unemployed instead of out of the labor force,
b. the unemployment rate would be higher and the labor-force participation rate wo
uld be lower.
c. the unemployment rate would be lower and the labor-force participation rate wo
uld be higher.
52. Discouraged workers

a. are not counted either as part of the adult population nor as part of the labor forc
e.
b. are counted as part of the adult population, but not as part of the labor force.
c. are counted as part of the adult population, and as unemployed.
d. None the above are correct.
ANSWER: b. are counted as part of the adult population, but not as part of the labor force.
53. The reported unemployment rate should be viewed as
a. clearly smaller than the true unemployment rate.
b. clearly larger than the true unemployment rate.
c. being very close to the true unemployment rate.
d. a useful but imperfect measure of joblessness. ANSWER: d. a useful but imperf
ect measure of joblessness. TYPE: M KEY1: D SECTION: 1

a. There is no easy way to fix the unemployment rate as reported by the BLS to ma
ke it a more reliable indicator of conditions in the labor market.
b. There are several easy ways economists have identified to fix the reported unem
ployment rate to make it a more reliable indicator of conditions in the labor mark
et.
c. There is one easy way of fixing the unemployment rate as reported by the BLS t
o make it a more reliable indicator of conditions in the labor market.
d. Economists have determined that the unemployment rate as reported by the BLS
is a perfectly reliable indicator of conditions in the labor market.
ANSWER: a. There is no easy way to fix the unemployment rate as reported by the
55.Which of the following is correct?

a. Short-term unemployment is a more serious problem than long-term unemploym
ent.
b. Most spells of unemployment are short term.
c. Most unemployed persons have been unemployed a long time.
ANSWER: b. Most spells of unemployment are short term.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
56. Most spells of unemployment are

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

a. relatively few workers who are unemployed a short time.
b. relatively few workers who are unemployed a long time.
c. a large number of workers who are unemployed a short time.
d. a large number of workers who are unemployed a long time. ANSWER: b. relat
ively few workers who are unemployed a long time.
58. Which of the following is not a reason actual labor markets experience unemployment?
a. flexible wages
b. unions
c. job search
d. minimum-wage legislation
ANSWER: a. flexible wages.
59. John is looking for work as a lawyer. He has turned down a couple of jobs to search for
a better match. Curtis is an out of work garbage collector. He would work for less than
what the jobs he applied for pay.
a. John and Curtis are both frictionally unemployed.
b. John and Curtis are both structurally unemployed.
c. John is frictionally unemployed and Curtis is structurally unemployed.
d. John is structurally unemployed and Curtis is frictionally unemployed.
ANSWER: c. John is frictionally unemployed and Curtis is structurally

60. Christine is looking for work as a sports broadcaster. Although her prospects are good
she hasn’t yet taken a job. Pam is looking for work in an automobile factory, but there
aren’t many job ads for automobile workers and every time she shows up for an intervi
ew, there are many more people than openings.
a. Christine and Pam are both frictionally unemployed.
b. Christine and Pam are both structurally unemployed.
c. Christine is frictionally unemployed and Pam is structurally unemployed.
d. Christine is structurally unemployed and Pam is frictionally unemployed. ANS
WER: c. Christine is frictionally unemployed and Pam is structurally : Y
61. Nancy is searching for a job that suits her tastes about where to live and the people she
works with.
Laura is looking for a job that makes the best use of her skills.
a. Nancy and Laura are both frictionally unemployed.
b. Nancy and Laura are both structurally unemployed.
c. Nancy is frictionally unemployed and Laura is structurally unemployed.
d. Nancy is structurally unemployed and Laura is frictionally unemployed.
62. The natural unemployment rate includes

a. both frictional and structural unemployment.
b. neither frictional nor structural unemployment.
c. structural, but not frictional unemployment.
d. frictional, but not structural unemployment. ANSWER: a. both frictional and st
ructural unemployment.
63. Job search
a. explains why the firms pay higher than the competitive equilibrium wage.
b. is due to the failure of wages to balance labor supply and labor demand.
c. is the process of matching workers with appropriate jobs.
ANSWER: c. is the process of matching workers with appropriate
64. People who are unemployed because of job search are best classified as
a. cyclically unemployed.
b. frictionally unemployed.
c. structurally unemployed.
d. discouraged workers.
ANSWER: b. frictionally unemployed.
65. Sectoral shifts in the economy
a. create structural unemployment.
b. immediately reduce unemployment.
c. increase unemployment due to job search.
d. on net leave unemployment unchanged.
ANSWER: c. increase unemployment due to job search.
66. Frictional unemployment can be the consequence of
a. workers leaving existing jobs to find ones they like better.
b. an industry declining while another is growing.
c. changes in the working conditions offered by competing firms.
a. Frictional unemployment is inevitable in a dynamic economy.
b. Although the unemployment created by sectoral shifts is unfortunate, in the long
run such changes lead to higher productivity and living standards.
c. About 1 percent of U.S. manufacturing jobs are destroyed each year.
d. In a typical month more than 3 percent of workers leave their jobs. ANSWER:
c. About 1 percent of U.S. manufacturing jobs are destroyed each year.
68. The government operates programs for job training and job information intended to red
uce unemployment.
a. Almost all economists agree that such programs are of no use.
b. Almost all economists agree that such programs work very well.
c. Some economists claim that the government can do these things no better than fi
rms and individuals could do them for themselves.
ANSWER: c. Some economists claim that the government can do these things no better
69. Unemployment insurance
a. protects workers from the financial hardship of being unemployed.
b. reduces job search unemployment.
c. decreases the natural rate of unemployment.
ANSWER: a. protects workers from the financial hardship of being unemployed.
70. We would predict that the more generous unemployment compensation a country has,
a. the longer the duration of each spell of unemployment, and the higher the unemp
loyment rate.
b. the shorter the duration of each spell of unemployment, and the higher the unem
ployment
rate.
c. the longer the duration of each spell of unemployment, and the lower the unempl
oyment rate.
d. the shorter the duration of each spell of unemployment, and the lower the unemp
loyment rate.
ANSWER: a. the longer the duration of each spell of unemployment, and the higher the
71. A typical American worker covered by unemployment insurance receives
a. 100 percent of their former wages for 26 weeks.
b. 50 percent of their former wages for 26 weeks.
c. 25 percent of their former wages for 50 weeks.
72.Economists have found evidence that receiving unemployment-insurance benefits

a. decreases the job-search effort of the unemployed.
b. has no effect on the job-search effort of the unemployed.
c. increases the job-search effort of the unemployed.
d. has an uncertain affect on the job-search effort of the unemployed. ANSWER:
a. decreases the job-search effort of the unemployed.
73. Most economists agree that eliminating unemployment insurance would

a. increase unemployment because people would quit jobs they thought were not se
cure.
b. increase unemployment because if the government didn’t provide unemployment
insurance private firms would offer superior insurance.
c. reduce unemployment and so improve economic well-being.
d. reduce unemployment, but they disagree about whether economic well-being wo
uld be enhanced by such a change.
ANSWER: d. reduce unemployment, but they disagree about whether economic well-being
74. An increase in the world price of oil would create a sectoral shift that would likely
a. increase unemployment, and the increase would be greater in a country with une
mployment insurance than in one without.
b. increase unemployment, but the increase would be smaller in a country with une
mployment insurance than in one without.
c. decrease unemployment, and the decrease would be greater in a country with un
employment insurance than in one without.
d. decrease unemployment, but the decrease would be smaller in a country with un
employment insurance than in one without.
ANSWER: a. increase unemployment, and the increase would be greater in a country with.
75. Minimum wages
a. have an important effect on the unemployment rates of certain groups.
b. are a predominant cause of unemployment in the economy.
c. affect all parts of the labor market equally.
d. do not cause unemployment.
ANSWER: a. have an important effect on the unemployment rates of certain groups.
76. An increase in the minimum wage would
a. increase both the quantity demanded and the quantity supplied of labor.
b. decrease both the quantity demanded and the quantity supplied of labor.
c. increase the quantity of labor demanded while decreasing the quantity supplied.
d. decrease the quantity of labor demanded while increasing the quantity supplied.
ANSWER: d. decrease the quantity of labor demanded while increasing the
77. There will be structural unemployment if

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

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

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

a. fell to $3, in this market there would be no affect on the unemployment rate.
b. remained there, in this market there would be 80 workers employed.
c. rose to $7, unemployment would rise by 20 workers.
d. rose to $7, there would be a surplus of workers.
ANSWER: d. rose to $7, there would be a surplus of workers.

82. If there were no minimum wage and then the government instituted a wage of $7, in thi
s market
a. employment would rise by 40.
b. employment would fall by 40.
c. unemployment would increase by 40.
d. there would be a surplus of 20. ANSWER: c. unemployment would increase by
40.
83. Collective bargaining refers to
a. the process by which unions and firms agree on the terms of employment.
b. the process by which the government sets exemptions from the minimum wage l
aw.
c. setting the same wage for all employees to prevent jealousy among workers.
d. setting the wage after discussion with employees in hopes of preventing unioniza
tion.
84. Between the 1940s and today, union membership

a. rose from about 1/6 to 1/3 of the labor force.
b. rose from about 1/3 to 1/2 of the labor force.
c. fell from about 1/2 to 1/3 of the labor force.
d. fell from about 1/3 to 1/6 of the labor force. ANSWER: d. fell from about 1/3 t
o
1/6 of the labor force.
85. In Sweden and Denmark, the percentage of the workers who belong to unions is
a. almost zero.
b. about the same as in the United States.
c. a bit greater than in the United States.
d. much greater than in the United States.
ANSWER: d. much greater than in the :

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

a. 0 to 5 percent more than similar workers who do not belong to a union.
b. 5 to 10 percent more than similar workers who do not belong to a union.
c. 10 to 20 percent more than similar workers who do not belong to a union.
d. 20 to 30 percent more than similar workers who do not belong to a union. ANS
WER: c. 10 to 20 percent more than similar workers who do not belong to
88. Effective collective bargaining will
a. increase the demand for union workers.
b. raise the wages of union workers.
c. raise the wages of nonunion workers.
ANSWER: b. raise the wages of union workers.
89. When a union bargains successfully with an employer, it
a. increases both the quantity of labor supplied and the quantity of labor demanded.
b. decreases both the quantity of labor supplied and the quantity of labor demande
d.
c. increases the quantity of labor supplied and decreases the quantity of labor dema
nded.
d. decreases the quantity of labor supplied and increases the quantity of labor dema
nded. ANSWER: c. increases the quantity of labor supplied and decreaN:
90. When a union bargains successfully with an employer, it

a. increases unemployment and wages.
b. decreases unemployment and wages.
c. increases unemployment and decreases wages.
d. decreases unemployment and increases wages. ANSWER: a. increases unempl
oyment and wages.
91. When unions raise wages in one sector of the economy, the supply of labor in other sect
ors of the economy
a. increases, raising wages in industries that are not unionized.

b. increases, reducing wages in industries that are not unionized.
c. decreases, raising wages in industries that are not unionized.
d. decreases, reducing wages in industries that are not unionized. ANSWER: b. in
creases, reducing wages in industries that are not unionized.
92. The Wagner Act of 1935
a. prevents employers from interfering when workers try to organize a union.
b. prevents unions from acting as cartels.
c. prevents firms from hiring workers to permanently replace striking workers.
d. allows workers joining a unionized firm to choose not to join the union. ANSWE
R: a. prevents employers from interfering when workers try to
93. The National Labor Relations Board
a. enforces antitrust laws against unions.
b. for a fee will act as a union’s representative in collective bargaining.
c. enforces workers' rights to unionize.
ANSWER: c. enforces workers' rights to unionize. M: Y
94. Right-to-work laws
a. guarantee workers the right to form unions.
b. give workers in a unionized firm the right to choose whether or not to join the un
ion.
c. prevent employers from hiring permanent replacements for workers who are on s
trike.
ANSWER: b. give workers in a unionized firm the right to choose whether to join the
95. In the absence of right-to-work laws, workers
a. would not be able to unionize.
b. would not be able to strike.
c. that went on strike could not be permanently replaced.
d. would have to join the union if they worked for a unionized firm. ANSWER: d.

a. Unions are bad for the economy as a whole.
b. Unions increase the level of employment in unionized firms.
c. Unions raise wages above the competitive equilibrium level.
d. Unions decrease the level of employment in nonunionized firms. ANSWER: c.
Unions raise wages above the competitive equilibrium level.
97. Unions
a. do not increase the natural rate of unemployment.

b. do not raise the wages of workers in the union.
c. reduce profits of firms.
d. cause wages of nonunionized workers to rise. ANSWER: c. reduce profits of fir
ms.
98. If U.S. antitrust laws were applied to unions,
a. the natural rate of unemployment rate would increase, ceteris paribus.
b. the natural rate of unemployment rate would decrease, ceteris paribus.
c. the natural rate of unemployment rate would not change.
d. the effect on the natural rate of unemployment rate is uncertain. ANSWER: buld

a. There is consensus among economists that unions are good for the economy.
b. There is consensus among economists that unions are bad for the economy.
c. There is consensus among economists that, on net, unions have almost no impact
on macroeconomic variables.
d. There is no consensus among economists about whether unions are good or bad f
or the economy.
ANSWER: d. There is no consensus among economists about whether unions are good or
100. The theory of efficiency wages explains why
a. setting wages at the equilibrium level may increase unemployment.
b. it may be in the best interest of firms to offer wages that are above the equilibriu
m level.
c. it may be in the best interest of firms to offer wages that are below the equilibriu
m level.
d. it is efficient for firms to set wages at the equilibrium level.
ANSWER: b. it may be in the best interest of firms to offer wages that are above the Y
101. According to the theory of efficiency wages, if Sarah, the CEO of a corporation that hir
es nonunion labor, decides to increase what she pays workers above the competitive eq
uilibrium wage,
a. the profits of her firm may increase as a result.
b. the higher wages will induce her workers to shirk.
c. the turnover of her workers may increase.
d. she will face a shortage of labor.
ANSWER: a. the profits of her firm may increase as a result.
102. Becky, the CEO of a corporation operating in Ethiopia, decides to raise the wages of he
r workers even though she faces an excess supply of labor. Her decision
a. might increase profits if it means that the wage is high enough for her workers to
eat a nutritious diet that makes them more productive.
b. will help eliminate the excess supply of labor if she raises it sufficiently.
c. though humanitarian, will certainly cause her profits to fall.
d. Both b and c are correct.

a. Turnover means that firms occasionally fire workers to set an example for the ot
her workers.
b. Workers are less likely to quit jobs if the firm is paying a high wage.
c. Firms may find it profitable to pay wages above the equilibrium level in order to
reduce quits.
d. Paying high wages will create a surplus of workers.
ANSWER: a. Turnover means that firms occasionally fire workers to set an example for
104. Arnie is the owner of a firm that produces bottled water in Washington state. There are
many such firms in the area. Arnie decides that if he pays his workers a wage higher tha
n the going market wage, his profits will increase. Which of the following is a likely ex
planation for his decision?
a. The higher the wage, the less often his workers will choose to leave his firm.
b. The higher the wage, the lower will be the cost of obtaining needed supplies.
c. The higher the wage, the more he can charge for his water.
d. All of the above are likely explanations for Arnie's decision.
ANSWER: a. The higher the wage, the less often his workers will choose to leave
105. Mary Sue is the newly appointed CEO of a company that manufactures clocks on an as
sembly line. Her staff has told her that the output the firm produces given the number o
f workers employed indicates some workers may be shirking. According to efficiency
wage theory, what should she do?
a. Reward those who shirk with higher wages.
b. Pay below the equilibrium wage rate to make up for the loss from shirking.
c. Make sure that workers are getting paid exactly the equilibrium wage rate.
d. Pay all workers more than the equilibrium wage rate. ANSWER: d. Pay all wor
kers more than the equilibrium wage rate.
106. Better management techniques of monitoring employee work effort would
a. increase real wages.
b. increase shirking.
c. increase labor-force participation rates.
d. reduce unemployment by reducing the need for efficiency wages. ANSWER: d.
reduce unemployment by reducing the need for efficiency wages.
107. Efficiency wages

a. reduce labor-force participation rates.
b. reduce the natural rate of unemployment.
c. reduce the incentive to shirk.
d. increase worker turnover.
ANSWER: c. reduce the incentive to shirk.
108. An efficient wage
a. may decrease the cost of production.
b. requires increased turnover.
c. helps to reduce the level of unemployment.
ANSWER: a. may decrease the cost of production.
109. According to the theory of efficiency wages, firms may pay
a. a wage above the competitive equilibrium level to reduce worker turnover.
b. a higher wage to improve the pool of workers they can hire from.
c. a high wage to provide an incentive to work hard.
110. Bill decides to hire some additional workers for his padlock factory. The equilibrium w
age is $12 per hour. Efficiency wage theory suggests that it is reasonable for Bill to offe
r
a. $12 per hour.
b. less than $12 per hour, since some people would be willing to work for less.
c. enough to attract the number of applicants necessary to fill the jobs available.
d. more than $12 per hour, so as to attract a better pool of applicants. ANSWER:
d. more than $12 per hour, so as to attract a better pool of applicants.
111. The worker quality variation of efficiency-wage theory suggests that if a firm pays a wa
ge higher than the equilibrium market wage,
a. it is guaranteed to hire only good-quality workers.
b. it increases the probability that the firm will hire good-quality workers.
c. it reduces the probability that the firm will hire good-quality workers.
ANSWER: b. it increases the probability that the firm will hire good-quality workers.
112. Four employers have justified their actions as follows. Whose logic is inconsistent with
the logic of efficiency wage theory?
a. Kay pays her workers less than the equilibrium wage so they won’t have the tim
e or money to look for work somewhere else.
b. Jay develops a new assembly line technology that limits the amount of shirking
workers may do, so he reduces what he pays his employees toward the equilibriu
m wage.
c. Ray pays his workers in a developing country more than the going wage hoping t
hat they will get a better diet and so be more productive.
d. All of the above are inconsistent with the logic of efficiency wage theory.
ANSWER: a. Kay pays her workers less than the equilibrium wage so they won’t have the
113. Which list has a problem caused by moral hazard followed by a problem caused by adv
erse selection?
a. Someone with auto insurance drives more recklessly; people avoid buying used
cars.
b. People with average health problems are reluctant to buy health insurance becau
se of its cost; someone with auto insurance drives more recklessly.
c. A firm that pays low wages faces greater risk of hiring inept employees; people a
void buying used cars
d. People with greater hidden health problems are more likely to buy health insuran
ce; a firm that pays low wages faces greater risk of hiring inept employees.
114. The worker quality variant of efficiency-wage theory

a. and the worker effort variant are both examples of moral hazard.
b. and the worker effort variant are both examples of adverse selection.
c. is an example of moral hazard, while the worker effort variant is an example of a
dverse selection.
d. is an example of adverse selection, while the worker effort variant is an example
of moral hazard.
t is an
115. An efficient wage designed to promote worker effort is designed principally to reduce a
problem created by
a. moral hazard, but it also increases unemployment.
b. moral hazard, but it also decreases unemployment.
c. adverse selection, but it also increases unemployment.
d. adverse selection, but it also decreases unemployment. ANSWER: a. moral haz
ard, but it also increases unemployment.
116. An efficient wage designed to ensure that quality workers are hired is designed principa
lly to reduce a problem created by
a. moral hazard, but it also increases unemployment.
b. moral hazard, but it also decreases unemployment.
c. adverse selection, but it also increases unemployment.
d. adverse selection, but it also decreases unemployment. ANSWER: c. adverse s

election, but it also increases unemployment.
117. Moral hazard arises when
a. the principal runs a risk that an agent will perform less than satisfactorily.
b. the principal is performing a task on behalf of an agent.
c. the agent cannot perfectly monitor the principal's behavior.
d. the principal fires an agent.
118. Which of the following is not an example of moral hazard?

a. A homeowner with fire insurance buys too few fire extinguishers.
b. A babysitter has children watch more television than the parents prefer.
c. A person who knows they are likely to get ill buys health insurance.
d. All of the above are examples of moral hazard.
ANSWER: c. A person who knows they are likely get ill buys health insurance.
119. Henry Ford
a. was forced by a union to pay $5.00 per day.
b. paid $5.00 per day to improve worker nutrition.
c. believed that $5.00 a day would increase worker productivity.
d. paid $5.00 per day to illustrate he was a humanitarian.
ANSWER: c. believed that $5.00 a day would increase worker productivity
120. Henry Ford called the $5-a-day wage
a. "one of the finest cost cutting moves we ever made."
b. "one of the worst decisions we ever made."
c. "the reason our company nearly went bankrupt."
d. "an expensive publicity stunt."
ANSWER: a. "one of the finest cost cutting moves we ever
121. Which of the following causes of unemployment is not associated with an excess suppl
y of labor? a. job search
b. minimum wage laws
c. unions
d. efficiency wages
ANSWER: a. job search
122. Which of the following causes of unemployment is associated with a wage rate above t
he market equilibrium level?
a. minimum wage laws
b. unions
c. efficiency wages

123. Which of the following causes of unemployment is not associated with a wage rate abo
ve the equilibrium level?
a. unions
b. job search
c. efficiency wages
d. minimum wage laws
ANSWER: b. job search
124. Which of the following causes of unemployment would most likely be affected by mor
e accessible information about job opportunities?
a. collective bargaining
b. job search
c. minimum wage laws
d. efficiency wages
ANSWER: b. job search
125. Which of the following tends to reduce the natural rate of unemployment?
a. unions
b. efficiency wages
c. job search
126. Which of the following explanations of the natural rate of unemployment is most impor
tant for the U.S. economy?
a. job search
b. minimum wage laws
c. unions
d. Economists have not determined the answer to this question. ANSWER: d. Eco
nomists have not determined the answer to this question.

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Chapter 26

Unemployment and Its Natural Rate

1. The natural rate of unemployment is

2. Cyclical unemployment refers to

ANSWER: d. All of the above are correct.

8. Unemployment data is collected

13. Who would be included in the labor force?

ANSWER: d. All of the above are correct.

NSWER: d. neither employed nor part of the labor force.

d.Both b and c are correct.

23. The labor-force participation rate is defined as follows:

c. 65 percent and 11.4 percent.

ANSWER: d. the unemployment rate increases, and the labor-force es.

c. Blacks have higher rates of labor-force participation and lower unemployment ra

40. A rough estimate of the natural rate of unemployment is

46. Recent entrants account for about

ANSWER: d. 1/2 of the:

ANSWER: c. Both a and b are correct.

ANSWER: d. None of the above are correct.

52. Discouraged workers

54. Which of the following is correct?

55.Which of the following is correct?

56. Most spells of unemployment are

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

ANSWER: c. John is frictionally unemployed and Curtis is structurally

62. The natural unemployment rate includes

72.Economists have found evidence that receiving unemployment-insurance benefits

73. Most economists agree that eliminating unemployment insurance would

77. There will be structural unemployment if

78. Minimum wage laws

80.The equilibrium wage and employment is

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

ANSWER: d. rose to $7, there would be a surplus of workers.

84. Between the 1940s and today, union membership

ANSWER: d. much greater than in the :

86. Which of the following is incorrect?

87. Union members typically earn

90. When a union bargains successfully with an employer, it

a. increases, raising wages in industries that are not unionized.

96. Which of the following is correct?

a. do not increase the natural rate of unemployment.

99. Which of the following is correct?

103. Which of the following is incorrect?

107. Efficiency wages

114. The worker quality variant of efficiency-wage theory

d. adverse selection, but it also decreases unemployment. ANSWER: c. adverse s

118. Which of the following is not an example of moral hazard?

ANSWER: d. All of the above are correct.

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