In a demand and supply diagram for a labor market, what is measured on the vertical axis?
The wage or salary
✓
The number of workers
The price of the good produced
The interest rate
Correct Answer
The wage or salary
The wage or salary is the price of labor, so it goes on the vertical axis just as price does in a market for goods. The number of workers, or hours worked, is the quantity of labor and goes on the horizontal axis. The price of the good produced belongs to the output market, not the labor market. The interest rate is the price in the market for financial capital.
Category: Labor Market Basics
Question 2
In a labor market, which group makes up the demand side?
Workers
Employers
✓
Savers
Lenders
Correct Answer
Employers
Employers demand labor because they hire people to produce goods and services, and they hire fewer workers at higher wages. Workers are the suppliers of labor. Savers supply funds in the market for financial capital. Lenders are also suppliers in the market for financial capital, not buyers of labor.
Category: Labor Market Basics
Question 3
Why do economists call the demand for labor a derived demand?
It is set by government rules on hiring
It is calculated from the supply of labor
It depends on demand for the products workers make
✓
It depends only on the wage workers will accept
Correct Answer
It depends on demand for the products workers make
Firms hire workers in order to produce output, so their demand for labor comes from, or is derived from, buyers' demand for that output; demand for chefs rises when demand for restaurant meals rises. It is set by government rules on hiring overstates the role of regulation, which is only one factor. It is calculated from the supply of labor confuses the two sides of the market. It depends only on the wage workers will accept ignores every factor that shifts labor demand.
Category: Labor Demand Shifters
Question 4
Demand for electric cars increases sharply. According to the model, what happens in the market for workers who assemble electric cars?
Labor supply shifts right; wages fall and employment rises
Labor demand shifts left; wages and employment fall
Labor supply shifts left; wages rise and employment falls
Labor demand shifts right; wages and employment rise
✓
Correct Answer
Labor demand shifts right; wages and employment rise
Because labor demand is derived from demand for output, more car sales lead firms to want more assemblers at every wage, shifting labor demand right and raising both the wage and employment. Labor supply shifts right; wages fall and employment rises places the change on the workers' side. Labor demand shifts left; wages and employment fall is the result of falling car sales. Labor supply shifts left; wages rise and employment falls would follow from fewer people being willing or qualified to do the work.
Category: Labor Demand Shifters
Question 5
A state begins requiring an extra year of training before anyone can work as an electrician. According to the model, what happens in the market for electricians?
Labor supply shifts left; wages rise and employment falls
✓
Labor supply shifts right; wages fall and employment rises
Labor demand shifts left; wages and employment fall
Labor demand shifts right; wages and employment rise
Correct Answer
Labor supply shifts left; wages rise and employment falls
A longer training requirement makes it harder to enter the occupation, so fewer people offer their labor at each wage and the supply curve shifts left, raising the wage and lowering employment. Labor supply shifts right; wages fall and employment rises is the effect of making entry easier. Labor demand shifts left; wages and employment fall and labor demand shifts right; wages and employment rise both wrongly place the change on the employers' side.
Category: Labor Supply Shifters
Question 6
Rapid population growth in a region adds many new job seekers qualified for warehouse work. According to the model, what happens in the market for warehouse workers?
Higher wages and more workers employed
Lower wages and more workers employed
✓
Higher wages and fewer workers employed
Lower wages and fewer workers employed
Correct Answer
Lower wages and more workers employed
More qualified people means more workers offered at every wage, so labor supply shifts right, lowering the equilibrium wage and raising employment. Higher wages and more workers employed is the result of an increase in labor demand. Higher wages and fewer workers employed is the result of a decrease in labor supply. Lower wages and fewer workers employed is the result of a decrease in labor demand.
Category: Labor Supply Shifters
Question 7
New software performs tasks that file clerks used to do by hand. According to the model, what happens in the labor market for file clerks?
Demand rises, raising wages and employment
Supply falls, raising wages and lowering employment
Demand falls, lowering wages and employment
✓
Supply rises, lowering wages and raising employment
Correct Answer
Demand falls, lowering wages and employment
Software that does the clerks' work is a substitute for their labor, so employers want fewer clerks at every wage and labor demand shifts left, lowering both wages and employment. Demand rises, raising wages and employment describes technology that complements workers, such as tools that make managers more productive. Supply falls, raising wages and lowering employment and supply rises, lowering wages and raising employment both wrongly treat the change as one in workers' willingness to work.
Category: Labor Demand Shifters
Question 8
In a city labor market, the equilibrium wage is $15 per hour with 800 workers employed. If a law requires $18 per hour, 1,000 people want jobs but firms want to hire only 500. What does the model predict?
A shortage of 500 workers
A surplus of 200 workers
A surplus of 300 workers
A surplus of 500 workers
✓
Correct Answer
A surplus of 500 workers
At the required wage, quantity supplied is 1,000 and quantity demanded is 500, so the surplus of labor is 1,000 - 500 = 500 workers. A shortage of 500 workers reverses the direction, since a wage floor above equilibrium makes quantity supplied the larger amount. A surplus of 200 workers compares job seekers with the old equilibrium of 800 instead of with the jobs offered. A surplus of 300 workers compares the old equilibrium of 800 with the 500 jobs offered.
Category: Price Controls
Question 9
A minimum wage is set below the equilibrium wage in a labor market. According to the model, what is its effect?
It has no effect on wages or employment
✓
It creates a surplus of labor
It creates a shortage of labor
It raises the market wage to a new level
Correct Answer
It has no effect on wages or employment
A minimum wage is a legal floor, and if the market wage is already higher, the floor is nonbinding and the market stays at its equilibrium. It creates a surplus of labor describes a floor set above equilibrium. It creates a shortage of labor would follow from a wage held below equilibrium, which a minimum cannot do. It raises the market wage to a new level is wrong because employers are already paying more than the minimum.
Category: Price Controls
Question 10
Which change shifts the labor supply curve for an occupation to the right?
A rise in the wage paid in the occupation
Government subsidies for training in the occupation
✓
A new rule requiring an extra degree to enter it
A rise in demand for what the occupation produces
Correct Answer
Government subsidies for training in the occupation
Training subsidies lower the cost of becoming qualified, so more people are able and willing to work in the occupation at every wage, shifting supply right. A rise in the wage paid in the occupation causes a movement along the supply curve, not a shift. A new rule requiring an extra degree to enter it shifts supply to the left. A rise in demand for what the occupation produces shifts labor demand, not labor supply.
Category: Labor Supply Shifters
Question 11
In the market for financial capital, which group supplies the funds?
Borrowers
Regulators
Savers
✓
Employers
Correct Answer
Savers
Savers, whether households or firms, supply financial capital because they expect to earn a rate of return on what they lend or invest. Borrowers demand financial capital and pay a rate of return for it. Regulators set rules but are not suppliers in the model. Employers are the demand side of the labor market.
Category: Financial Capital Basics
Question 12
In the demand and supply model of financial capital, what plays the role of the price?
The quantity of loans
The wage rate
The exchange rate
The interest rate
✓
Correct Answer
The interest rate
The interest rate, or rate of return, is what borrowers pay and savers receive, so it goes on the vertical axis as the price of financial capital. The quantity of loans is measured on the horizontal axis. The wage rate is the price of labor. The exchange rate is the price of one currency in terms of another, which belongs to a different market.
Category: Financial Capital Basics
Question 13
In the credit card market, at an interest rate of 20%, lenders want to lend $800 billion but borrowers want to borrow only $500 billion. What does the model predict?
Interest rates will fall as lenders compete for borrowers
✓
Interest rates will rise as borrowers compete for loans
The demand curve will shift right to absorb the extra funds
The supply curve will shift right to meet borrowers' needs
Correct Answer
Interest rates will fall as lenders compete for borrowers
With $300 billion more offered than demanded, there is a surplus of credit, so lenders cut rates or fees to attract borrowers and the rate falls toward equilibrium. Interest rates will rise as borrowers compete for loans is the adjustment to a shortage. The demand curve will shift right to absorb the extra funds and the supply curve will shift right to meet borrowers' needs are wrong because a change in the rate moves the market along both curves rather than shifting either.
Category: Financial Market Equilibrium
Question 14
A state caps credit card interest rates at 36%, while the equilibrium rate is 15%. According to the model, what is the effect of the cap?
A shortage of credit at the 36% rate
None, because the cap is not binding
✓
A surplus of credit at the 15% rate
A rise in the market rate to 36%
Correct Answer
None, because the cap is not binding
A cap on interest rates is a price ceiling, and a ceiling set above the equilibrium rate does not bind, so the market stays at 15%. A shortage of credit at the 36% rate is wrong because no one is charging 36% and a shortage arises only from a cap below equilibrium. A surplus of credit at the 15% rate is wrong because 15% is the equilibrium, where the quantities match. A rise in the market rate to 36% wrongly treats a ceiling as a target.
Category: Price Controls
Question 15
During a recession, firms become less confident that new investments will pay off. According to the model, what happens in the market for financial capital?
Supply shifts left; the rate rises and quantity falls
Demand shifts right; the rate and quantity rise
Demand shifts left; the rate and quantity fall
✓
Supply shifts right; the rate falls and quantity rises
Correct Answer
Demand shifts left; the rate and quantity fall
Firms are borrowers, and when they expect less from new projects they want to borrow less at every rate, so demand shifts left and both the equilibrium interest rate and quantity of loans fall. Supply shifts left; the rate rises and quantity falls describes savers lending less. Demand shifts right; the rate and quantity rise describes growing confidence. Supply shifts right; the rate falls and quantity rises describes savers lending more.
Category: Financial Market Equilibrium
Question 16
Foreign investors decide to lend less to U.S. borrowers. According to the model, what happens to the equilibrium interest rate and quantity of loans in the United States?
The rate falls and the quantity rises
Both the rate and the quantity rise
Both the rate and the quantity fall
The rate rises and the quantity falls
✓
Correct Answer
The rate rises and the quantity falls
Foreign investors are part of the supply of financial capital, so lending less shifts supply left, raising the interest rate and lowering the quantity of loans. The rate falls and the quantity rises is the effect of more foreign lending. Both the rate and the quantity rise is the effect of an increase in demand. Both the rate and the quantity fall is the effect of a decrease in demand.
Category: Financial Market Equilibrium
Question 17
Investment A becomes riskier, while the risk of Investment B is unchanged. According to the model, how does the supply of financial capital to each investment change?
Supply to A falls and supply to B rises
✓
Supply to A rises and supply to B falls
Supply to both investments rises
Supply to both investments falls
Correct Answer
Supply to A falls and supply to B rises
Savers weigh the rate of return against risk, so when A becomes riskier some of them move their funds from A to B, shifting the supply of capital to A left and to B right. Supply to A rises and supply to B falls reverses the response to risk. Supply to both investments rises and supply to both investments falls ignore that savers are choosing between the two.
Category: Financial Capital Basics
Question 18
In a market economy, what coordinates how buyers and sellers respond to a change in demand or supply?
Orders from a central planning agency
Changes in market prices
✓
Quotas set by industry groups
Rules from consumer advocacy groups
Correct Answer
Changes in market prices
Prices gather and pass along information about demand and supply, so buyers adjust according to their preferences and budgets and sellers adjust according to expected profit, with no one directing them. Orders from a central planning agency describe a command economy, not a market system. Quotas set by industry groups and rules from consumer advocacy groups are not how a market system coordinates decisions.
Category: Prices as Information
Question 19
Economists sometimes compare price controls to the saying "Don't kill the messenger." What point does this comparison make?
Controls punish sellers who report their costs accurately
Controls remove the shift in demand or supply behind a price change
Controls block the price signal but leave the scarcity in place
✓
Controls raise prices above what most buyers can afford
Correct Answer
Controls block the price signal but leave the scarcity in place
A price carries news about demand and supply, so forcing it to stay put silences the message without changing the forces behind it, and people lose the signal they need to adjust. Controls punish sellers who report their costs accurately misreads the saying. Controls remove the shift in demand or supply behind a price change is wrong because the underlying shift remains. Controls raise prices above what most buyers can afford describes only some floors and misses the point about information.
Category: Prices as Information
Question 20
Demand for nurses rises as the population ages, while the supply of nurses falls because many retire. What does the model predict with certainty?
Employment rises; the change in wages is uncertain
Both wages and employment rise
Wages fall and employment rises
Wages rise; the change in employment is uncertain
✓
Correct Answer
Wages rise; the change in employment is uncertain
Both shifts push the wage up, so it definitely rises, but higher demand pushes employment up while lower supply pushes it down, so the net change in the number of nurses depends on which shift is larger. Employment rises; the change in wages is uncertain reverses which variable is known. Both wages and employment rise assumes the demand shift is larger, which is not given. Wages fall and employment rises contradicts the direction both shifts push the wage.
Category: Labor Market Basics