Chapter

Unemployment and Its Natural Rate

1. The amount of __________increases when the economy goes into a recession and decreases when
the economy goes into an expansion.
a. structural unemployment
b. seasonal unemployment
c. cyclical unemployment
d. frictional unemployment

2. It is difficult for cyclically unemployed persons to find jobs because

a. they typically do not meet the qualifications required for the available jobs.
b. the economy is in a recession.
c. they voluntarily quit their last jobs and employers may view them as unreliable.
d. they typically have not looked long enough to find a job.

3. The natural rate of unemployment is the economist’s notion of

a. full employment.
b. cyclical employment.
c. structural unemployment.
d. frictional unemployment.

4. Yuan recently completed his college degree and is entering the labor market for the first time. He
has been submitting applications and has been interviewed twice in the last two weeks, but so far
has not found a job. Yuan could be classified as
a. frictionally unemployed.
b. seasonally unemployed.
c. structurally unemployed.
d. cyclically unemployed.

5. Providing training for unemployed individuals will help to alleviate

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

6. According to the data from the Bureau of Labor Statistics found here, the labor force totals
Number of workers employed 8,400
Frictional unemployment 250
Structural unemployment 350
Cyclical unemployment 600
Discouraged workers 400
Adult population 12,000
a. 7,550.
b. 8,000.
c. 8,400.
d. 9,600

7. According to the data from the Bureau of Labor Statistics found here, the unemployment rate is

165
 a. 12.5 percent.
b. 15 percent.
c. 16 percent.
d. 24 percent.

8. According to the data from the Bureau of Labor Statistics found here, the labor force participation
rate is
a. 12.5 percent.
b. 25 percent.
c. 60 percent.
d. 80 percent.

9. Brian Vargo, an auto repair mechanic who remains unemployed because he refuses to work for less
than $1,000 per hour, is
a. counted as part of the labor force and is unemployed.
b. considered frictionally unemployed.
c. an underemployed worker.
d. not counted as part of the labor force.

10. The existence of many discouraged workers in an economy may cause us to

a. overstate the employment rate.
b. understate the employment rate.
c. overstate the unemployment rate.
d. understate the unemployment rate.

11. Changes in the composition of demand among industries or regions are called
a. frictional shifts.
b. sectoral shifts.
c. structural shifts.
d. temporary shifts.

12. Unemployment insurance

a. tends to increase unemployment by decreasing the cost of being unemployed.
b. tends to decrease unemployment by providing limited resources to the unemployed.
c. increases the hardships associated with unemployment.
d. increases the amount of job security demanded by employees.

13. Fred is a low-skilled worker who washes dishes in a local restaurant. He is worried about a
proposed increase in the minimum wage because price
a. floors tend to create shortages.
b. ceilings tend to create shortages.
c. floors tend to reduce quantity demanded.
d. ceilings tend to reduce quantity demanded.

14. If the market for day care workers is in equilibrium at $5.00 per hour as shown in this diagram, a
minimum wage of $8.00 per hour will increase unemployment by
 a. 300 workers.
b. 500 workers.
c. 600 workers.
d. no workers.

15. Consider two labor markets in which jobs are equally attractive in all respects other than the wage
rate. All workers are equally able to do either job. Initially, both labor markets are perfectly
competitive. If a union organizes workers in one of the markets, then the wage rates will tend to
a. rise in both markets.
b. fall in both markets
c. rise for the union jobs, but remain unchanged for the nonunion jobs.
d. rise for the union jobs and fall for the nonunion jobs.

16. Unions attempt to raise wage rates for their members by

a. reducing the supply of the product their members produce.
b. lowering barriers to entry so their members have greater opportunities.
c. reducing the demand for labor so there are fewer nonunion competitors.
d. negotiating a higher-than-competitive wage rate.

17. The process of negotiation between union and management to arrive at a labor contract is called
a. arbitration.
b. mediation.
c. collective bargaining.
d. reconciliation.

18. The legislation that granted unions the legal right to organize workers and bargain collectively with
employers was the
a. Norris-LaGuardia Act.
b. Wagner Act.
c. Taft-Hartley Act.
d. Sherman Act.

19. To negotiate a higher wage rate, a union cannot

a. start with a strike and then work to reach a contract to end the strike.
 b. negotiate in good faith and expect to hold its bargaining power.
c. expect to maintain the same level of employment.
d. offer a supply curve of labor that is horizontal.

20. Efficiency wages are

a. lower than market wages paid by employers to increase profitability.
b. higher than market wages paid by employers to increase productivity.
c. government-determined minimum wages set to protect workers from unfair employers.
d. negotiated by unions when officials are interested in trimming work forces.

21. The idea of paying workers an efficiency wage is that

a. doing so is more efficient than paying them the market wage.
b. paying them less gives them the incentive to work harder.
c. workers and management gain at the expense of the stockholders of the company.
d. workers have the incentive to do high-quality work.

22. Henry Ford found that by paying an efficiency wage

a. he was able to bust the autoworkers union.
b. workers worked longer hours.
c. absentee and quit rates fell.
d. he could spend less on workers and more on capital equipment.

23. A potential problem with efficiency wages is that if all firms try to do it
a. no one will have a job.
b. unemployment will occur.
c. workers will have higher salaries than managers.
d. unions will go on strike against them.

24. When an agent lacks an incentive to promote the best interests of the principal, and the principal
cannot observe the actions of the agent, there is said to be
a. an optimal contract.
b. monitoring.
c. a separating equilibrium.
d. moral hazard.

25. Carlos, who knew nothing about construction, paid Joe to remodel a room in his house. Two years
later, the wall of the new room crumbled because Joe used poor-quality materials. This is an
example of
a. moral hazard.
b. an optimal contract.
c. monitoring.
d. adverse selection.

26. The fact that someone with a high risk of medical problems is more likely to buy a lot of health
insurance is an example of
a. adverse selection.
b. monitoring.
c. moral hazard.
d. an optimal contract.

27. Guarantees may not completely eliminate adverse selection problems because
a. no one guarantees a product 100%.
 b. getting the firm to honor guarantees is too much work.
c. a firm that makes low-quality products may issue guarantees and then go out of business.
d. a firm offering guarantees subjects itself to lawsuits concerning their obligations.

28. Adverse selection is less of a problem

a. the less often buyers and sellers deal with each other.
b. the more often buyers and sellers deal with each other.
c. if guarantees are not enforceable.
d. if there is also a lot of moral hazard.