Chapter 9 The Goals of Stabilization Policy:
Low Inflation and Low Unemployment

1) Inflation has no effect on an economy's well-being if

A)  it is universally and accurately anticipated

B)  relative prices are unaffected

C)  the nominal rate of interest for both savers and borrowers rises by an amount just equal to the rate of inflation

D)  all of these

2) According to Gordon, the main losers due to the redistributive effect of the postwar inflation in the United States were

A)  households

B)  corporations

C)  government

D)  foreigners

3) Unanticipated inflation will hurt ______and help ______.

A)  pensioners; borrowers

B)  borrowers; pensioners

C)  the government; tax payers

D)  homeowners; banks

4) The costs of inflation depend upon

A)  whether it is anticipated or unanticipated

B)  who pays it and who receives it

C)  the future savings rate

D)  none of the above

5) Unanticipated inflation will insure that

A)  homeowners with outstanding mortgage balances are hurt.

B)  homeowners with outstanding mortgage balances are benefited.

C)  creditors gain, debtors lose.

D)  none of the above

6) "Shoe leather costs" refer to

A)  a cobbler's payment for leather.

B)  "rubber costs: on today's shoes.

C)  the inconvenience imposed by higher interest rates.

D)  financial deregulation of retail business firms.

7) Indexation is designed to

A)  moderate the costs of inflation, not inflation itself.

B)  rapidly reduce inflation.

C)  reduce the natural rate of unemployment.

D)  rapidly reduce inflationary expectations.

8) A program of complete indexation would

A)  eliminate most of the costs of inflation.

B)  increase the sensitivity of the economy to supply shocks.

C)  make the role of expectations negligible.

D)  All of these

9) If short-term government bond rates were indexed

A)  such bonds would be a poor hedge against inflation.

B)  banks and saving and loan institutions would likely lose deposits.

C)  the government would gain from the implied inflation tax.

D)  the government would gain from the implied inflation subsidy.

10)  Which of the following anti-inflation policies imposes costs on society?

A)  price controls.

B)  indexation.

C)  reduced growth in nominal demand.

D)  All of these

11)  The real rate of interest

A)  is equal to the nominal rate when Y equals YN.

B)  is equal to the nominal rate minus the rate of inflation.

C)  is equal to the nominal rate plus the rate of inflation.

D)  is never negative.

12)  If the nominal interest rate is 10% and expected inflation is 5%, the real expected interest rate is

A)  15% .

B)  -5% .

C)  5% .

D)  10% .

13)  The actual real interest rate and the expected real interest rate will be identical if

A)  pe = p .

B)  pe > p .

C)  pe < p .

D)  None of the above

14)  If the market rate of interest is 13%, the growth of nominal GDP 9%, and the growth of real GDP 2%, then

A)  the rate of inflation is 11% .

B)  the rate of inflation is 4% .

C)  the rate of inflation cannot be determined.

D)  None of the above

15)  In the early 1980s the government's primary method of combating inflation was

A)  price and wage controls.

B)  undoing the "self-inflicted" wounds.

C)  restrictive monetary policy.

D)  indexing bonds to protect savers.

16)  The costs imposed by inflation should be lessened in the future because of the following reform that took place during the early 1980s

A)  airline deregulation.

B)  issuance of indexed government bonds.

C)  changing tax laws to ensure that savers are taxed only on real, rather than nominal capital gains.

D)  lifting of limits on interest paid on checking and savings accounts.

17)  Although critics are doubtful, some have argued that the four-fold increase in the natural rate of employment in Europe is due to several causes. Which of the following is not included as a cause?

A)  high marginal tax rates.

B)  high unemployment benefits.

C)  excessive government regulation.

D)  low real wages.

18)  In which of the following countries have indexed bonds become a majority of the total outstanding bonds?

A)  U.S.

B)  U.K.

C)  Israel

D)  Australia

E)  Sweden

19)  "Disgruntled" workers who quit their jobs to find "a more reasonable boss" are experiencing

A)  involuntarily unemployment.

B)  mismatch unemployment.

C)  cyclically unemployment.

D)  turnover unemployment.

20)  The elimination of hourly rate assembly line jobs for unskilled workers by robots is an example of

A)  involuntary unemployment.

B)  mismatch unemployment.

C)  cyclical unemployment.

D)  turnover unemployment.

21)  Unemployment that results when individuals who have voluntarily quite their jobs are seeking jobs is called

A)  cyclical unemployment.

B)  turnover unemployment.

C)  mismatch unemployment.

D)  natural unemployment.

22)  The natural rate of unemployment is that rate

A)  below which the economy can never be.

B)  corresponding to full-employment.

C)  corresponding to a constant rate of inflation.

D)  which is zero.

23)  "Natural unemployment" includes those out of work because of

A)  expected or normal turnover which will always characterize a part of the labor force.

B)  structural unemployment caused by normal technological change in production.

C)  a recession.

D)  A and B.

24)  Suppose that the number of jobs for engineers expands by 10 percent per year, the number of new engineers by 5 percent per year while the number of automobile mechanics grows by 8 percent and the number of new automobile mechanics jobs grows by 3 percent. We conclude that

A)  frictional unemployment will increase.

B)  frictional unemployment will decrease.

C)  structural unemployment will increase.

D)  structural unemployment will increase 4 times.

25)  Many extended periods of high actual unemployment above the natural rate have been the result of

A)  deliberate government anti-inflationary policy.

B)  high job turnover.

C)  mismatches in the labor market.

D)  unemployment compensation.

26)  If other things are constant, the longer the average unemployed worker searches before accepting a job

A)  the lower will be the measured unemployment rate.

B)  the higher will be the measured unemployment rate.

C)  the lower will be the natural unemployment rate.

D)  none of the above.

27)  Mismatch and turnover unemployment, while conceptually easy to distinguish, are often difficult to identify. Ceteris paribus, a person out of work for two months would be classified by
Gordon as

A)  experiencing turnover unemployment.

B)  experiencing mismatch unemployment.

C)  impossible to distinguish the type.

D)  first frictionally unemployed (the first month) and then structurally unemployed.

28)  Mismatch and turnover unemployment, while conceptually easy to distinguish, are often difficult to identify. Ceteris paribus, a person out of work for six months or an extended period would be classified by Gordon as

A)  experiencing turnover unemployment.

B)  experiencing mismatch unemployment.

C)  impossible to distinguish the type.

D)  first frictionally unemployed(the first month) and then structurally unemployed.

29)  An increase in the amount and time period for which unemployment compensation is paid will most likely

A)  increase the structural rate of unemployment.

B)  leave the natural rate of unemployment unchanged.

C)  decrease the natural rate of unemployment.

D)  increase turnover unemployment.

30)  Which of the following will not affect the natural rate of unemployment?

A)  minimum wage legislation

B)  restrictive monetary policy

C)  employer discrimination

D)  geographic immobility

31)  The turnover view of unemployment stresses that

A)  most job vacancies have skill requirements not possessed by the unemployed.

B)  many job vacancies are located in different areas of the country than are the unemployed.

C)  there exist incentives for workers to refuse to accept jobs.

D)  there exists racial/and or sex discrimination against some workers.

32)  Which of the following would not reduce the natural rate of unemployment?

A)  a tax cut

B)  an increase in government expenditures

C)  wage or price controls

D)  all of the above

33)  The payment of unemployment compensation tends to induce business firms to

A)  layoff workers as opposed to lowering sales.

B)  search for new workers for shorter periods of time.

C)  layoff workers as opposed to increasing inventories and/or reducing hours worked for all employees.

D)  recall previously laid off workers more rapidly.

34)  The "benefits" from government programs to reduce mismatch unemployment include reduction in

A)  private costs such as lost income and erosion of job skills.

B)  private costs such as lost leisure and lower alcohol consumption.

C)  social costs such as lower unemployment compensation and welfare payments.

D)  A and C.

35)  Which of the following statements is true?

A)  Adult males, adult females, and teenagers all have similar rates of unemployment due to job losses.

B)  Almost half of the total teenage unemployment rate appears to be due to the search for the first job.

C)  Relative to adult males, adult females and teenagers have more frequent unemployment due to reentry and higher quit rates.

D)  All of the above.

36)  The layoff of workers in virtually all industries during the 1982 recession is an example of the classification of workers as

A)  voluntarily unemployed.

B)  structurally unemployed.

C)  cyclically unemployed.

D)  frictionally unemployed.

37)  In recent years new automobile factories have opened in California and Ohio and closed in Detroit where the unemployment of automobile workers has increased. This unemployment could be decreased if

A)  "moving costs" from Detroit to California and Ohio were reduced.

B)  information about the new jobs was made available to the unemployed workers at reduced cost.

C)  workers with the appropriate skills were relatively scarce in Ohio and California.

D)  all of the above.

38)  When mismatch unemployment characterizes an economy

A)  monetary and fiscal policies to raise AD are the appropriate government action.

B)  only monetary policy will be effective.

C)  monetary and fiscal policies to raise AD are not the appropriate government action.

D)  only general (not specific) fiscal policy will be effective.

39)  It appears that many business firms discriminate against hiring young women of child bearing age in the U.S. and that this type of discrimination has been reduced in Europe. This may be an example of successful government intervention because

A)  many European governments have laws against this type of discrimination.

B)  many European governments subsidize maternity leave and child care, lowering the cost of hiring these women.

C)  Europeans are less likely to discriminate on the basis of gender.

D)  Europeans are more likely to discriminate on the basis of gender.

40)  The payment of subsidies to firms who locate in high unemployment, depressed regions

A)  is an example of a program to cure job discrimination.

B)  is an example of a program to cure "mismatch unemployment."

C)  has been universally successful in curing unemployment.

D)  is "bribery" and against the law.

41)  A major difference between the costs of unemployment and the costs of inflation is that

A)  the former is structural the latter frictional.

B)  the government pays the latter, the population pays the former.

C)  unemployment costs are concentrated among a few people, while inflation costs are distributed more broadly across the entire population.

D)  unemployment costs are distributed among people, while inflation costs are distributed more narrowly across the entire population.

42)  A worker that quits her job

A)  is always counted among the unemployed.

B)  is never counted among the unemployed.

C)  will be counted among the structurally unemployed.

D)  may or may not be counted among the unemployed.

43)  When Okun's "misery index" is used to judge macroeconomic conditions, inflation is being considered

A)  not to be a macroeconomic problem at all.

B)  a less serious macroeconomic problem than unemployment.

C)  just as serious a macroeconomic problem as unemployment.

D)  a more serious macroeconomic problem than unemployment.

44)  When the misery index is used to judge macroeconomic conditions, reducing inflation by one percentage point

A)  has no effect at all on how we judge the economy's performance.

B)  is of less benefit to the economy than reducing the unemployment rate by one percentage point.

C)  gives the same benefit to the economy as reducing the unemployment rate by one percentage point.

D)  is of greater benefit to the economy than reducing the unemployment rate by one percentage point.

45)  The U.S. macroeconomic experience of the early to mid- 1980s is an example of how

A)  reducing inflation comes at the cost of a permanent reduction in real GDP.

B)  reducing inflation comes at the cost of a temporary reduction in real GDP.

C)  reducing inflation can be done costlessly by simply increasing the money growth rate.

D)  increasing the money growth rate affects inflation alone, and not real GDP.

46)  In the late 1980s, Canada embarked on an ambitious policy of reducing inflation to zero. Inflation did come down, while the unemployment rate ______, which ______the U.S. disinflation experience of the 1980s.

A)  rose, runs counter to

B)  rose, duplicates

C)  remained nearly constant, runs counter to

D)  remained nearly constant, duplicates

47)  The textbook uses as its precise definition of hyperinflation an inflation rate

A)  below zero.

B)  of less than one percent per year.

C)  of more than one hundred percent per year.

D)  of more than one thousand percent per year.

E)  of more than fifty percent per month.

48)  The "quantity equation" states that nominal GDP is equal by the definition of velocity to the money supply ______velocity.

A)  plus

B)  minus

C)  multiplied by

D)  divided by

49)  From the quantity equation we find that the rate of inflation is equal by definition to the growth rate of the money supply ______the growth rate of velocity ______the growth rate of real GDP.

A)  plus, plus

B)  plus, minus

C)  minus, plus

D)  minus, minus

50)  From the quantity equation we find that the rate of inflation is equal by definition to the growth rate of nominal GDP ______the growth rate of real GDP.