1. If the unemployment rate is currently above the natural rate of unemployment, GDP must be ___ potential GDP and the economy is _____ full employment.

A.    above; above.

B.    above; below.

C.    below; below.

D.   below; above.

 

2. When the unemployment rate matches the natural unemployment rate,

A.    there is no structural or cyclical unemployment.

B.    there is no cyclical unemployment

C.    there is no frictional cyclical unemployment.

D.   there is no frictional or structural unemployment.

 

3. If a worker loses her job because her company has permanently outsourced the work to another country and shut down the factory, this worker would be experiencing:

A.    frictional unemployment

B.    structural unemployment

C.    cyclical unemployment

D.   natural unemployment

 

4. If a student graduates from college and is searching for a job, this worker would be experiencing:

A.    frictional unemployment

B.    structural unemployment

C.    cyclical unemployment

D.   natural unemployment

 

5. If everyone expects inflation of 5% over the next year and inflation actually turns out to be 3%,

A.    lenders would win and borrowers would lose.

B.    borrowers would win and lenders would lose.

C.    both lenders and borrowers would win.

D.   both lenders and borrowers would lose.

 

6. Suppose that a household has wealth of $200,000 at the beginning of the year. Over the year, their wealth grows to $220,000. If the household experienced capital losses of $10,00 during the year, we can conclude that,

A.    household saving during the year was $10,000

B.    household saving during the year was $30,000

C.    investment during the year was $10,000

D.   investment during the year was $30,000

 

7. Suppose there is a natural disaster that wipes out a considerable fraction of the economy’s capital stock. Based on the classical model of the economy, this would cause labor productivity to ____ and potential GDP to ____.

A.    fall; fall

B.    fall; not change.

C.    rise; fall.

D.   none of the above

 

8. Which of the following would simultaneously decrease the real wage and increase potential GDP?

A.    if more capital is added

B.    if better technology is added

C.    if the population grows

D.   all of the above.

 

9. When wages rise, workers will increase the number of hours worked

A.    always if they are rational

B.    if the income effect is greater than the substitution effect

C.    if the substitution effect is greater than the income effect

D.   only if they are irrational

 

10. Consider the market for loanable funds. Which of the following would lead to increased investment and higher interest rates?

A.    a decrease in household saving.

B.    if business becomes more optimistic about future sales and profits

C.    a higher tax on corporate profits

D.   none of the above.

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