Class: Date: Macro CH 23 sample test question Multiple Choice Identify the choice that best completes the statement or answers the question. 1. Potential GDP is defined as a. the level of GDP created by the Okun gap. b. the current level of real GDP. c. nominal GDP, that is, the level of GDP not corrected for price changes. d. the level of real GDP at full employment. e. the level of real GDP that equals nominal GDP. 2. The level of real GDP the economy produces at full employment is called a. possible GDP. b. nominal GDP. c. potential GDP. d. maximum GDP. e. Lucas GDP. 3. Potential GDP is the level of a. GDP that is impossible to achieve. b. real GDP that the economy could produce at full employment. c. nominal GDP that is smaller than the real GDP. d. GDP that fluctuates around actual GDP. e. GDP that would be produced if all workers were fully employed and there was no unemployment. 4. Potential GDP is the GDP that the economy a. produces in a particular quarter. b. would produce if unemployment were equal to zero. c. produces when inflation is equal to zero. d. would produce if it were at full employment. e. produces when the Okun gap equals the Lucas wedge. 5. Which of the following statements is (are) correct about potential GDP? i. Actual real GDP equals potential GDP when the economy is at full employment. ii. Real GDP can be less than potential GDP. iii. When real GDP equals potential GDP, it also equals nominal GDP. a. i only. b. ii only. c. ii and iii. d. i and ii. e. i, ii, and iii. 6. Choose which statement is most correct. a. Real GDP can never exceed potential GDP. b. Real GDP must always equal potential GDP. c. At times, real GDP can exceed potential GDP. d. Nominal GDP can never exceed potential GDP. e. Nominal GDP must always equal potential GDP 1
7. The sustainable upper limit of real GDP is a level of GDP that is a. greater than potential GDP, but by how much greater is unknown and controversial. b. less than potential GDP, but by how much less is unknown and controversial. c. potential GDP. d. determined only by what is the full employment equilibrium in the labor market. e. None of the above answers is correct because there is no sustainable upper limit to real GDP because real GDP can always be increased. 8. A country's potential GDP is determined, in part, by a. the equilibrium price level. b. demand and supply in the labor market. c. the Lucas wedge. d. actual real GDP. e. the Okun gap. 9. A country reports that its actual real GDP is greater than its nominal GDP. It must be that a. an error was made when calculating actual real GDP. b. the price level is increasing. c. more workers decided to quit work in order to enjoy leisure time. d. the excess by which real GDP exceeds nominal GDP is only temporary and eventually real GDP will decrease to be equal to nominal GDP. e. None of the above answers is correct because it is impossible for a country's real GDP to exceed its nominal GDP. 10. A country reports that for the year 2006, real GDP was $3,500 billion and nominal GDP was $4,200 billion. If the country's potential GDP is $3,900 billion, the country is a. producing at a level less than its full-employment level of output. b. temporarily producing beyond its potential GDP. c. producing at its full-employment level of output. d. efficiently using all of its resources to produce output. e. None of the above answers is correct because it is impossible for either real GDP or nominal GDP to exceed potential GDP. 11. The production function is a relationship between the amount of labor employed and a. the maximum quantity of real GDP that can be produced. b. the maximum quantity of nominal GDP that can be produced. c. the wage rate paid to the workers. d. all other resources at different levels of employment. e. the amount of labor workers supply. 12. As additional units of labor hours are employed, holding all other factors constant, along the production function, a. real GDP increases at an increasing rate. b. nominal GDP decreases at an increasing rate. c. real GDP increases at a decreasing rate. d. real GDP increase at a constant rate. e. real GDP initially decreases and then starts to increase. 13. The production function relationship between real GDP and labor is a a. straight line. b. curve that becomes less steep because of diminishing returns. c. curve that becomes steeper because of increasing returns. d. curve that becomes steeper because of diminishing returns. e. U-shaped curve. 2
14. As the quantity of labor employed increases, the production functions exhibits a a. positive, linear relationship. b. positive relationship, with each additional unit of labor producing less additional real GDP. c. positive relationship, with each additional unit of labor producing more additional real GDP. d. negative, linear relationship. e. U-shaped curve. 15. As more labor is hired, moving along the production function diminishing returns occur because a. workers are overworked and so their productivity decreases. b. the wage rate paid is too low and so workers decrease their work effort. c. there are fixed quantities of other resources. d. the real wage rate must increase in order to hire additional workers. e. real GDP increases more rapidly the more workers are hired. 16. Employing an additional 1 billion hours of labor increases real GDP by $12 billion. Employing another 1 billion hours beyond the first 1 billion increases real GDP by $11 billion. Hence we can conclude from this information that as employment increases, real GDP a. increases at an increasing rate. b. decreases at an increasing rate. c. decreases at a decreasing rate. d. increases at a decreasing rate. e. falls from $12 billion to $11 trillion as more workers are hired. 17. The table above gives a nation's production function. Which of the following is NOT an attainable combination of real GDP and labor? a. Real GDP of $7.5 trillion and labor of 100 billion hours per year. b. Real GDP of $7.5 trillion and labor of 150 billion hours per year. c. Real GDP of $7.8 trillion and labor of 150 billion hours per year. d. Real GDP of $7.5 trillion and labor of 50 billion hours per year. e. real GDP of $6.0 trillion and labor of 100 billion hours per year. 3
18. The above figure shows a nation's production function. Point A is a. attainable if the economy is inefficient. b. unattainable given the state of the economy. c. attainable if the nation uses resources efficiently. d. the maximum amount of real GDP the nation can produce. e. the labor market equilibrium quantity of employment and real GDP. 19. The above figure shows a nation's production function. Point B is a. unattainable. b. attainable if the nation uses resources inefficiently. c. attainable if the nation uses resources efficiently. d. the maximum amount of real GDP the nation can ever produce. e. Both answers C and D are correct. 20. The above figure shows a nation's production function. Point C is a. unattainable given the nation's resource level. b. attainable if the nation uses resources efficiently. c. attainable if the nation uses resources inefficiently. d. the maximum amount of real GDP the nation can produce. e. the labor market equilibrium point. 4
21. Based on the production function in the above figure, when the economy uses 300 billion hours of labor, the potential GDP is a. $5.0 trillion. b. $7.5 trillion. c. $10.0 trillion. d. $12.5 trillion. e. $2.5 trillion. 22. Based on the production function in the above figure, which of the following is an attainable combination of labor and real GDP? i. 300 billion hours of labor and real GDP of $12.5 trillion. ii. 300 billion hours of labor and real GDP of $5.0 trillion. iii. 100 billion hours of labor and real GDP of $10.0 trillion. a. i only. b. ii only. c. iii only. d. ii and iii. e. i and ii. 23. The total labor hours that all the firms in the economy plan to hire during a given time period at one particular real wage rate is the a. demand for labor. b. quantity of labor demanded. c. supply of labor. d. quantity of labor supplied. e. quantity of jobs supplied. 24. If the real wage rate decreases from $8.00 per hour to $7.50 per hour, the a. quantity demanded of labor increases. b. demand for labor increases. c. quantity supplied of labor increases. d. supply of labor increases. e. equilibrium quantity of employment must decrease. 5
25. The demand for labor reflects the point that the a. lower the real wage rate, the greater the quantity of labor demanded. b. higher the real wage rate, the greater the quantity of labor demanded. c. real wage rate does not effect the quantity demanded of labor. d. nominal wage rate and not the real wage rate determines the quantity of labor demanded. e. demand for labor depends on the supply of labor. 26. The demand for labor curve is a. a vertical line because firms have to hire labor. b. upward sloping, showing that as the real wage rate increases, more workers are hired. c. a horizontal line because we assume that the real wage rate is fixed. d. downward sloping, showing that the quantity of labor demanded increases when the real wage falls. e. U-shaped. 27. A firm's demand for labor depends on the a. nominal wage rate because it pays workers in dollars. b. real wage rate, which equals the nominal wage divided by the price level. c. real wage rate, which equals the nominal wage divided by the hours worked. d. nominal wage rate, which equals the real wage divided by the price level. e. supply of labor. 28. The quantity of labor demanded by a firm depends upon a. the nominal wage rate not the real wage rate. b. the real wage rate not the nominal wage rate. c. both the real wage rate and the nominal wage rate. d. neither the real wage rate nor the nominal wage rate. e. either the real wage rate or the nominal wage rate, depending whether the price level is increasing or decreasing. 29. A firm hires labor up to the point where the a. real wage rate equals the nominal wage rate. b. additional hour of labor produces extra output that equals the real wage rate. c. additional hour of labor produces extra output that equals the nominal wage rate. d. firm can sell the extra output. e. real wage rate exceeds the nominal wage rate. 30. As long as an additional worker hired by a firm produces a. more output than the real wage rate, the firm will hire that worker. b. more output than the real wage rate, the firm will not hire that worker. c. less output than the real wage rate, the firm will hire that worker. d. some output, the firm will hire that worker. e. more output than the nominal wage rate, the firm will hire that worker. 31. The Bubby Gum factory produces bubble gum. Joanne is one of the employees, and she produce 10 packs of bubble gum per hour. Joanne's money wage rate is $12 per hour. Based on this information, the Bubby Gum company should a. keep Joanne because she creates a profit for the firm. b. fire Joanne because she creates a loss for the firm. c. decrease Joanne's wage rate because she is paid too much. d. increase its demand for labor. e. None of the above answers are correct because more information about Joanne's real wage is needed to decide what to do with Joanne. 6
32. The Bubby Gum factory produces bubble gum. Joanne is one of the employees, and she produces 10 packs of bubble gum per hour. Joanne's money wage rate is $12 per hour. If a packet of bubble gum sells for $1.00, then a. Joanne is creating a $2.00 per hour loss for the firm. b. Joanne is creating a $2.00 per hour profit for the firm. c. the Bubby Gum company should decrease the price of the bubble gum so it sells more and makes a larger profit. d. the Bubby Gum company should pay Joanne more. e. The Bubby Gum company should increase its demand for labor. 33. To maximize profits, firms hire labor as long as a. each additional hour hired produces more additional output than the real wage rate. b. the total hours hired produces more additional output than the real wage rate. c. each additional hour hired produces more additional output than the nominal wage rate. d. the quantity of labor supplied increases as the real wage rate increases. e. workers continue to supply labor to the firm. 34. An increase in the wage rate the quantity of labor supplied and the quantity of labor demanded. a. increases; increases b. increases; decreases c. decreases; increases d. decreases; decreases e. does not change; decreases 35. For a household, the opportunity cost of not working is the a. nominal wage rate. b. real wage rate. c. cost of living. d. price level. e. demand for labor. 36. Which of the following statements is (are) true? i. As the real wage rate increases, the household's income decreases, which influences people to work more hours. ii. As the real wage rate increases, the quantity of labor demanded increases. iii. As the real wage rate increases, the opportunity cost of not working increases. a. i only. b. ii only. c. iii only. d. i and iii. e. i, ii, and iii. 37. The supply of labor is defined as the relationship between the real wage rate and the a. quantity of labor supplied by firms. b. amount of jobs supplied by firms. c. quantity of labor supplied by households. d. amount of jobs supplied by households. e. equilibrium quantity of employment. 7
38. Households increase the quantity of labor supplied when the a. real wage rate rises because the opportunity cost of not working falls. b. nominal wage rate rises because the real wage rate must also rise. c. real wage rate rises because the opportunity cost of not working rises. d. nominal wage rate falls because the opportunity cost of not working rises. e. income tax rises because an increase in the income tax increases the demand for labor. 39. Households increase the quantity of labor supplied when a. the real wage increases. b. the real wage decreases. c. job opportunities increase. d. the nominal wage decreases and the price level rises. e. income taxes increase. 40. Holding all other influences constant, the quantity of labor supplied in a given time period depends a. inversely on the real wage rate so that a higher real wage decreases the quantity of labor supplied. b. directly on the real wage rate so that a higher real wage increases the quantity of labor supplied.. c. inversely on the quantity of labor demanded. d. on the money wage rate not the real wage rate. e. directly on the quantity of labor demanded. 41. The labor market is in equilibrium whenever a. the nominal wage is decreasing. b. the nominal wage is increasing. c. the real wage is decreasing. d. the real wage is increasing. e. the quantity of labor demanded equals the quantity of labor supplied. 42. A surplus of labor is eliminated by in the real wage rate and a shortage of labor is eliminated by in the real wage rate. a. an increase; an increase b. an increase; a decrease c. a decrease; an increase d. a decrease; a decrease e. None of the above answers are correct because shortages and surpluses are eliminated by changes in the demand for labor and the supply of labor, not the wage rate. 43. A surplus in the labor market indicates that the a. real wage rate is above the equilibrium wage rate but it is too low to eliminate the surplus of labor. b. quantity of labor demanded is less than the quantity of labor supplied. c. real wage rate has to rise before the labor market will reach equilibrium. d. workers are not looking for work because they enjoy their leisure time. e. real wage rate is less than the equilibrium wage rate. 8
44. When the labor market is in equilibrium, i. the quantity demanded of labor equals the quantity supplied. ii. there is full employment. iii. potential GDP is produced. a. i only. b. ii only. c. iii only. d. i and iii. e. i, ii, and iii. 45. When the labor market is in equilibrium, a. there is excess labor supplied, which keeps real GDP less than potential GDP. b. there is full employment, which means that real GDP equals potential GDP. c. the real wage rate falls to equal the nominal wage rate because real GDP is greater than potential GDP. d. the real wage rate rises to allow real GDP to equal potential GDP. e. there is full employment but real GDP might be greater than, less than, or equal to potential GDP. 46. The table above shows the labor demand and labor supply schedules for a nation. The equilibrium real wage rate is and the equilibrium quantity of labor is billions of hours per year. a. $25; 260 b. $20; 280 c. $20; 260 d. $15; 260 e. $40; 320 9
47. The tables above show a nation's labor demand and labor supply schedules and its production function. The equilibrium real wage rate is and the equilibrium quantity of labor is billion hours per year. a. $50; 100 b. $40; 90 c. $30; 80 d. $40; 80 e. $20; 110 48. The tables above show a nation's labor demand and labor supply schedules and its production function. Given the equilibrium in the labor market, potential GDP is a. $3.0 trillion. b. $3.7 trillion. c. $4.2 trillion. d. $4.5 trillion. e. $2.0 trillion. 49. In the United States between the 1960s and the 1990s, the productivity of labor increased. This increase led to a. an increase in the demand for labor. b. an increase in the supply of labor. c. a downward shift of the production function. d. a decrease in the supply of labor. e. no change in either the demand for or the supply of labor. 50. If the economy is at full employment then the unemployment rate is a. equal to zero. b. equal to the natural unemployment rate. c. below the natural unemployment rate. d. above the natural unemployment rate. e. positive only because of job rationing. 51. The average unemployment rate in the United States during the 1950s was a. between 5 and 7 percent. b. between 10 and 15 percent. c. between 7 and 10 percent. d. below 5 percent. e. over 15 percent. 10
52. If we compare the average U.S. unemployment rates over the past 6 decades since the 1950s, we see that the a. 1990s had the highest average unemployment rate. b. unemployment rate has steadily declined since the 1950s. c. unemployment rate was highest in the 1980s and lowest in the 1950s. d. unemployment rate was the lowest in the 1990s and highest in the 1960s. e. unemployment rate was highest in the 1980s and lowest in the 1970s. 53. Since the 1950s, in the United States the decade-average unemployment rate a. has been constant. b. has steadily declined. c. peaked during the 1980s. d. reached its lowest levels during the 1990s. e. reached its lowest levels during the 1980s. 54. The increase in the average unemployment rate in the 1970s was the result of a. the reduction of overly generous unemployment benefits in the 1970s. b. an increase in the birth rate in the early 1970s. c. an increase in the birth rate in the late 1940s and early 1950s. d. higher real wage rates. e. repeated increases in the minimum wage. 55. A newspaper headline reads "A New Wave of Baby Boomers Enters the Job Market!" This wave of young, new entrants to the labor market is likely to lead to a. an increase in the natural unemployment rate. b. a decrease in the unemployment rate. c. no effect on the unemployment rate. d. a decrease in the country's potential GDP. e. a decrease in the natural unemployment rate but an increase in the actual unemployment rate. 56. If the amount paid as unemployment benefits decreases, the opportunity cost of job search a. rises and people would stay unemployed longer. b. is not affected because unemployment benefits do not change job availability. c. rises and people stay unemployed for a shorter time. d. falls and people stay unemployed for a shorter time. e. falls and people stay unemployed for a longer time. 57. France offers its citizens generous unemployment benefits for up to 24 months. The United States offers its citizens less generous unemployment benefits for up to 6 months. From this information, it is likely that the natural unemployment rate is a. greater in France than in the United States. b. less in France than in the United States. c. equal in France and the United States. d. near zero in France, and much greater than zero in the United States. e. unaffected by unemployment benefits in the both France and the United States. 58. The length of time people spend in search of a job increases if a. the population ages. b. unemployment benefits increase. c. the criteria necessary to qualify for unemployment benefits increases. d. there is a sudden change in technology. e. the minimum wage is decreased. 11
59. France is considering implementing policies that will reduce the duration of job search. A possible option is for France to a. increase the minimum wage. b. help negotiate higher union benefits for employed workers. c. reduce unemployment benefits. d. require all residents between the ages of 19 and 26 to obtain a part-time or full-time job. e. Both answers A and B are correct. 60. Data indicate that the natural unemployment rate in Canada is 3 percentage points higher than the U.S. natural unemployment rate. This difference is most likely the result of differences in a. natural climate. b. population. c. the value of the currency. d. unemployment benefits. e. more structural change in the United States. 61. If we compare the Canadian natural unemployment rate to the U.S. natural unemployment rate, we find a. they are essentially the same because we have a lot in common. b. the Canadian rate is higher, possibly the result of higher unemployment benefits in Canada. c. the U.S. rate is higher, possibly the result of greater job search within a larger country. d. the Canadian rate is higher, possibly the result of higher unemployment benefits in the United States. e. The U.S. rate is higher, possibly the result of more structural change occurring in the United States. 62. Structural change influences the unemployment rate and such structural change is created by changes in a. real GDP. b. the seasons. c. technology. d. population. e. the minimum wage. 63. Efficiency wages, above equilibrium minimum wage rates, and higher union wages are likely to a. increase the natural unemployment rate. b. increase cyclical unemployment. c. reduce the equilibrium real wage rate. d. increase the equilibrium real wage rate. e. decrease the natural unemployment rate. 64. Job rationing occurs when the real wage rate is a. below the equilibrium wage rate so there is an excess supply of labor. b. above the equilibrium wage rate so there is a shortage of labor. c. equal to the equilibrium wage rate so there is no excess supply of labor. d. above the equilibrium wage rate so there is an excess supply of labor. e. Both answers A and D are correct because whenever the real wage rate is above or below the equilibrium wage rate, there is an excess supply of labor. 65. The presence of efficiency, minimum and union wages a. can explain job rationing because they lower the natural unemployment rate. b. can explain job rationing because they raise the real wage rate above equilibrium. c. can explain job rationing because they lower the real wage rate below equilibrium. d. does not effect job rationing because they affect only the amount of job search. e. cannot explain job rationing because they are a natural part of the economy. 12
66. An efficiency wage is designed to a. induce more work effort. b. keep the minimum wage from rising. c. keep the minimum wage from falling. d. to induce more employment. e. decrease the need for workers to search for jobs. 67. Efficiency wages are a. the legal minimum wage a firm can pay a worker. b. a possible cause of job rationing because they drive wages below their equilibrium level. c. a possible cause of job rationing because they drive wages above their equilibrium level. d. a possible cause of job rationing because they force wages to equal their equilibrium level. e. another name for the equilibrium wage. 68. The figure above shows the market for fast food restaurant employees in a college town. The local Taco Bell pays its workers $9 an hour. This wage rate is a. an efficiency wage aimed at reducing employee turnover. b. designed reduce the unemployment rate. c. an effort to increase the demand for labor. d. the actual equilibrium wage rate. e. illegal because the equilibrium wage rate is $6 an hour. 69. To increase workers' incomes, the City of New York's government set a wage below which it is illegal for employers to pay employees. This wage is referred to as the a. minimum wage. b. efficiency wage. c. government wage. d. union wage. e. city wage. 70. The minimum wage is a a. possible cause of job search because it lowers wages below their equilibrium. b. possible cause of job rationing because it lowers wages below their equilibrium. c. government established highest wage that is legal to pay. d. possible cause of job rationing because it raises wages above their equilibrium. e. factor that decreases unemployment because fewer people search for work if the minimum wage is increased. 13
71. If the minimum wage is set a. below the equilibrium wage, it will create unemployment. b. above the equilibrium wage, it will create unemployment. c. equal to the equilibrium wage, it will create a shortage of labor. d. below the equilibrium wage, it will create a shortage of labor. e. equal to the equilibrium wage, it will create a surplus of labor. 72. In the above figure, a minimum wage will not change the unemployment rate if it is set at a. $5.00. b. $7.00. c. $10.00. d. Both B and C are correct because any wage rate that exceeds $6 per hour has no effect on the unemployment rate. e. None of the above because the minimum wage always affects the unemployment rate. 73. It is estimated that, on the average and without taking account of skill differentials, union wages are a. less than nonunion wages. b. equal to nonunion wages. c. 30 percent higher than nonunion wages. d. 100 percent higher than nonunion wages. e. 66 percent higher than nonunion wages. 74. The presence of union wages leads to a. a fall in the real wage rate as fewer people are hired. b. a fall in the real wage rate as more people are hired. c. less job search as more workers are hired. d. job rationing because the real wage exceeds the equilibrium real wage. e. lower unemployment because workers do not want to lose the high union wage they are being paid. 75. The Fair Labor Standards Act originally set the minimum wage at a. $1.25 in 1983. b. $1.25 in 1938. c. $0.25 in 1938. d. $0.25 in 1983. e. $3.00 in 1960. 14
76. The real minimum wage rate a. has generally increased since 1965. b. has generally decreased since 1965. c. was at its highest level in 1995. d. fell after 1965 until it reached a minimum around 1985 and has generally risen since then.. e. has stayed in the range between $6 and $5 (measured in 2000 dollars per hour) since 1965. 77. If the government increases unemployment benefits, then the labor a. demand curve shifts rightward. b. demand curve shifts leftward. c. supply curve shifts rightward. d. supply curve shifts leftward. e. Both answers B and D are correct. 78. If the government increases unemployment benefits, then the equilibrium amount of employment and potential GDP. a. increases; increases b. increases; decreases c. decreases; increases d. decreases; decreases e. does not change; does not change 79. If the government raises income taxes, then the labor a. demand curve shifts rightward. b. demand curve shifts leftward. c. supply curve shifts rightward. d. supply curve shifts leftward. e. Both answers B and D are correct. 80. If the government raises income taxes, then the equilibrium amount of employment and potential GDP. a. increases; increases b. increases; decreases c. decreases; increases d. decreases; decreases e. does not change; does not change 15