A country has 190 million employed people, 10 million unemployed people and an adult population of 250 million. What is its unemployment rate? Round to one decimal place.
5.0%
✓
4.0%
5.3%
80.0%
Correct Answer
5.0%
The unemployment rate is unemployed divided by the labor force, and the labor force is 190 + 10 = 200 million, so 10 / 200 = 0.05, or 5.0%. The value 4.0% wrongly divides by the whole adult population of 250 million. The value 5.3% divides by the employed only instead of the full labor force. The value 80.0% is the labor force participation rate, 200 / 250.
Category: Labor Force Calculations
Question 2
An economy has an adult population of 300 million, with 180 million employed and 15 million unemployed. What is the labor force participation rate? Round to one decimal place.
60.0%
65.0%
✓
7.7%
92.3%
Correct Answer
65.0%
The labor force is 180 + 15 = 195 million, and the participation rate is 195 / 300 = 0.65, or 65.0%. The value 60.0% counts only the employed and leaves out the unemployed. The value 7.7% is the unemployment rate, 15 / 195. The value 92.3% is the employed share of the labor force, 180 / 195.
Category: Labor Force Calculations
Question 3
Which person is counted as unemployed in official U.S. labor statistics?
A retiree who is no longer seeking work
A full-time student who is not looking for a job
A laid-off worker who applied for several jobs last week
✓
A worker who stopped searching after months of rejections
Correct Answer
A laid-off worker who applied for several jobs last week
To be counted as unemployed, a person must be without a job, available to work and actively looking for work, which describes the laid-off worker who applied for several jobs last week. A retiree who is no longer seeking work is out of the labor force. A full-time student who is not looking for a job is also out of the labor force. A worker who stopped searching after months of rejections is a discouraged worker, counted as out of the labor force.
Category: Measuring Unemployment
Question 4
A worker who wants a job but has given up searching because she believes none are available is classified in official statistics as what?
Unemployed
Employed part time
Underemployed
Out of the labor force
✓
Correct Answer
Out of the labor force
Discouraged workers are not actively looking for work, so official statistics count them as out of the labor force even though they would like a job. Unemployed requires active job search, which she has stopped. Employed part time would require that she holds a job. Underemployed describes people who have jobs that do not use their skills or give them the hours they want.
Category: Measuring Unemployment
Question 5
Which change would tend to lower an economy's natural rate of unemployment?
Better tools for workers to learn about job openings
✓
A larger share of teenagers in the labor force
A deep recession that cuts total spending
Wages that rise faster than productivity
Correct Answer
Better tools for workers to learn about job openings
When workers can learn about openings and contact employers more easily, they spend less time between jobs, which lowers frictional unemployment and the natural rate. A larger share of teenagers in the labor force raises the natural rate, since young workers change jobs more often. A deep recession that cuts total spending raises cyclical unemployment, which is not part of the natural rate. Wages that rise faster than productivity tend to raise unemployment for a time.
Category: Natural Rate
Question 6
Which monthly survey of U.S. households is used to calculate the official unemployment rate?
Establishment Payroll Survey
Current Population Survey
✓
Consumer Expenditure Survey
Survey of Consumer Finances
Correct Answer
Current Population Survey
The Current Population Survey interviews a sample of households each month about work and job search, and its results produce the official unemployment rate. The Establishment Payroll Survey asks businesses and government agencies about jobs on their payrolls. The Consumer Expenditure Survey measures household spending. The Survey of Consumer Finances measures household wealth and debt.
Category: Measuring Unemployment
Question 7
Which groups together make up the labor force?
The employed plus people not seeking work
Every adult aged 16 and older
The employed plus the unemployed
✓
Only people with full-time jobs
Correct Answer
The employed plus the unemployed
The labor force is everyone who is working for pay plus everyone who is jobless but actively looking for work. The employed plus people not seeking work wrongly adds people who are out of the labor force. Every adult aged 16 and older is the adult population, which also includes retirees, students and others not in the labor force. Only people with full-time jobs leaves out part-time workers and the unemployed.
Category: Measuring Unemployment
Question 8
What type of unemployment rises when the economy enters a recession and falls during an expansion?
Frictional unemployment
Structural unemployment
Seasonal unemployment
Cyclical unemployment
✓
Correct Answer
Cyclical unemployment
Cyclical unemployment moves with the business cycle, climbing when total spending and output fall and declining as the economy recovers. Frictional unemployment comes from the time workers spend moving between jobs. Structural unemployment comes from a mismatch between workers' skills and the skills employers want. Seasonal unemployment follows predictable patterns within a year, such as winter layoffs in construction.
Category: Types of Unemployment
Question 9
A software developer quits to look for a job that better fits her skills and spends six weeks interviewing before accepting an offer. What type of unemployment is this?
Frictional unemployment
✓
Cyclical unemployment
Structural unemployment
Seasonal unemployment
Correct Answer
Frictional unemployment
Frictional unemployment is the short-term unemployment that occurs while workers search for and move between jobs, and it can lead to better matches. Cyclical unemployment would be caused by a recession, which is not the case here. Structural unemployment would mean her skills are no longer in demand, but they are. Seasonal unemployment follows the time of year, which plays no role here.
Category: Types of Unemployment
Question 10
After their industry adopts new technology, many workers find that employers no longer want the skills they have. What type of unemployment do they face?
Frictional unemployment
Structural unemployment
✓
Cyclical unemployment
Seasonal unemployment
Correct Answer
Structural unemployment
Structural unemployment occurs when workers lack the skills the labor market now values, often because demand has shifted away from their skills, and it can last a long time without retraining. Frictional unemployment is a short search between jobs by workers whose skills are still wanted. Cyclical unemployment is caused by a recession rather than a lasting change in skill demand. Seasonal unemployment follows the time of year.
Category: Types of Unemployment
Question 11
Which types of unemployment make up the natural rate of unemployment?
Cyclical and frictional unemployment
Cyclical and structural unemployment
Frictional and structural unemployment
✓
Cyclical unemployment alone
Correct Answer
Frictional and structural unemployment
The natural rate is the unemployment that remains when the economy is neither booming nor in recession, so it includes frictional and structural unemployment but not cyclical unemployment. Cyclical and frictional unemployment wrongly includes the cyclical part. Cyclical and structural unemployment also wrongly includes the cyclical part. Cyclical unemployment alone is the part that is excluded from the natural rate.
Category: Natural Rate
Question 12
When the actual unemployment rate equals the natural rate, the economy is at full employment. What does real GDP equal at that point?
Nominal GDP
The lowest level of GDP
Real GDP per capita
Potential GDP
✓
Correct Answer
Potential GDP
At full employment, the economy produces its potential GDP, the level of output it can sustain with unemployment at the natural rate. Nominal GDP measures output at current prices and is a different concept. The lowest level of GDP would occur in a deep recession, not at full employment. Real GDP per capita is output per person, not a benchmark for full employment.
Category: Natural Rate
Question 13
Suppose unemployment drops below its natural rate for a short time. How does real GDP compare with the output the economy produces at full employment?
It is above that level
✓
It is below that level
It is equal to that level
It is equal to nominal GDP
Correct Answer
It is above that level
When unemployment is below the natural rate, the economy is producing more than its sustainable full-employment output, much like workers putting in overtime, and this can last only briefly. It is below that level describes unemployment above the natural rate. It is equal to that level describes unemployment exactly at the natural rate. It is equal to nominal GDP confuses real output with output measured at current prices.
Category: Natural Rate
Question 14
In a recession, the demand for labor shifts left while the wage stays at its original level. According to the labor market model, what happens?
Quantity of labor demanded exceeds quantity supplied
Quantity of labor supplied exceeds quantity demanded
✓
The wage falls until the market clears
The supply of labor shifts to the right
Correct Answer
Quantity of labor supplied exceeds quantity demanded
With the wage stuck above the new equilibrium, more people want to work at that wage than employers want to hire, and the gap is unemployment. Quantity of labor demanded exceeding quantity supplied would be a labor shortage, which happens when the wage is below equilibrium. The wage falling until the market clears is what flexible wages would do, not sticky ones. The supply of labor shifting to the right is not caused by a fall in labor demand.
Category: Sticky Wages
Question 15
According to the labor market model, if wages were fully flexible and the demand for labor fell, what would happen?
The wage would rise and hiring would increase
The wage would stay fixed and joblessness would rise
The wage would fall until all willing workers find jobs
✓
The supply of labor would shift left to offset it
Correct Answer
The wage would fall until all willing workers find jobs
With flexible wages, a drop in labor demand pushes the wage down to a new equilibrium where everyone willing to work at that wage can find a job, so no involuntary unemployment results. The wage would rise and hiring would increase describes a rise in labor demand. The wage would stay fixed and joblessness would rise describes sticky wages. The supply of labor would shift left to offset it is not what the model predicts, since supply changes little in the short run.
Category: Sticky Wages
Question 16
A firm pays more than the market wage because better-paid workers tend to work harder and quit less often. Which theory explains this choice?
Insider-outsider model
Implicit contract theory
Relative wage coordination
Efficiency wage theory
✓
Correct Answer
Efficiency wage theory
Efficiency wage theory holds that paying above the market wage can raise productivity by boosting effort and reducing costly quitting, hiring and training. The insider-outsider model focuses on current employees who train new hires and keep operations running. Implicit contract theory describes an unwritten deal of steady pay in bad times and modest raises in good times. Relative wage coordination is about workers resisting cuts unless others take cuts too.
Category: Sticky Wages
Question 17
According to the adverse selection argument, why might a firm lay off some workers rather than cut every worker's pay?
Pay cuts would push the best workers to leave first
✓
Laws forbid any reduction in a worker's pay
Pay cuts would raise the firm's tax payments
Laid-off workers will return for less pay later
Correct Answer
Pay cuts would push the best workers to leave first
If a firm cuts everyone's pay, the most productive workers, who have the best outside options, are the most likely to quit, so the firm keeps its weakest workers. Laws forbid any reduction in a worker's pay is incorrect, since most U.S. wages are not set by law or union contract. Pay cuts would raise the firm's tax payments is not part of the argument. Laid-off workers will return for less pay later is not the reasoning behind adverse selection.
Category: Sticky Wages
Question 18
Which group is counted as employed even though it is part of hidden unemployment?
Discouraged workers who stopped searching
Part-time workers who want full-time jobs
✓
Laid-off workers seeking new jobs
Retirees who are not seeking work
Correct Answer
Part-time workers who want full-time jobs
Part-time workers who want full-time jobs hold jobs, so they count as employed, even though they are not working as much as they would like. Discouraged workers who stopped searching are counted as out of the labor force. Laid-off workers seeking new jobs are counted as unemployed. Retirees who are not seeking work are out of the labor force and are not part of hidden unemployment.
Category: Measuring Unemployment
Question 19
Which age group generally has the highest unemployment rate in the United States?
Workers aged 20 to 24
Workers aged 25 to 54
Workers aged 16 to 19
✓
Workers aged 55 and older
Correct Answer
Workers aged 16 to 19
Unemployment rates are highest for teenagers and generally fall with age, partly because young workers change jobs more often and have less experience. Workers aged 20 to 24 have high rates too, but lower than teenagers. Workers aged 25 to 54 have lower rates because they have stronger attachment to their jobs. Workers aged 55 and older have the lowest rates, partly because many who lose jobs retire instead of searching.
Category: Patterns of Unemployment
Question 20
Because wages adjust slowly, how does an unexpected rise in productivity growth tend to affect unemployment over the following several years?
It tends to raise unemployment
It leaves unemployment unchanged
It raises unemployment permanently
It tends to lower unemployment
✓
Correct Answer
It tends to lower unemployment
When productivity rises faster than expected, wages lag behind for a while, so workers become a better deal for employers and the demand for labor grows, lowering unemployment, and with it the natural rate, until wages catch up. It tends to raise unemployment is the effect of an unexpected productivity slowdown. It leaves unemployment unchanged ignores the slow adjustment of wages. It raises unemployment permanently is wrong in both direction and duration, since wages eventually adjust.
Category: Natural Rate