Chapter 8

Potential GDP

is the output an economy could produce at full employment.

The period of declining growth in real GDP between the peak of the business cycle and the trough is called the

contractionary phase.

A general mismatch between the skills of unemployed workers and the skills needed by employers with job openings results in

structural unemployment.

When information about potential jobs is costly to acquire and individuals must spend time searching for jobs, which type of unemployment will result?

frictional

The economy's potential output is

the maximum sustainable output of the economy given its resources

The best definition of inflation is a(n)

persistent increase in the general level of prices as measured by a price index.

The type of unemployment resulting from the fact that labor market information is less than perfect is called

frictional unemployment.

When individuals are unemployed because they lack the qualifications to fill available jobs, this is called

structural unemployment

The employment/population ratio is the number of persons employed divided by the number of persons

in the civilian population age 16 and over

The unemployment rate is defined as the number of

unemployed individuals divided by the number of individuals employed plus the number of unemployed.

When the rate of cyclical unemployment is zero, the

economy is considered to be at full employment.

Economists define full employment as the level of employment that results when

the rate of unemployment is normal, considering both frictional and structural factors.

Full employment is the rate of employment that results when

only frictional and structural unemployment are present

The labor force participation rate is defined as the number of

unemployed individuals plus employed individuals divided by the number of individuals in the working-age population.

When people speak of the labor force participation rate, they are actually talking about the percentage of

working-age people who are either working or seeking work.

Frictional unemployment

is present even when labor markets are working well.

Which of the following is a positive effect of job search and the unemployment that often accompanies it?

It permits individuals to better match their skills and preferences with the requirements of a job.

Which of the following is true of high and variable rates of inflation?

When such rates are present, it will be difficult for people to accurately forecast next year's rate of inflation.

Higher unemployment insurance benefits tend to increase unemployment because they

reduce the opportunity cost of job search and, hence, increase the search time.

Which of the following is true?

Some unemployment will be present even when a dynamic labor market is operating efficiently.

High and variable rates of inflation will

distort the information delivered by market prices

Anna has just finished high school and started looking for her first job, but has not yet found one. As a result, the unemployment rate

increases, and the labor-force participation rate increases

Suppose that a large number of men who used to work or seek work now no longer do either. Other things the same, this makes the

the number of people unemployed and the labor force both falls.

The recessionary phase of the business cycle is characterized by

decreasing real output and increasing unemployment

Suppose you received a 3 percent increase in your nominal wage. Over the year, inflation ran about 6 percent. Which of the following is true?

Your real wage fell

The natural rate of unemployment is not zero because

the economy is characterized by dynamic change and imperfect information

Actual GDP will be below potential GDP

during a recession

If borrowers and lenders expect a higher rate of inflation

nominal interest rates will tend to rise.

If the labor force grows at a faster rate than the number employed, the

unemployment rate will rise

During a boom, the actual rate of unemployment will be

less than the natural rate of unemployment.

Tara just graduated from college. In order to devote all her efforts to college, she didn't hold a job. She is going to cruise around the country on her motorcycle for awhile before she starts looking for work. As a result, the unemployment rate

is unaffected, and the labor-force participation rate is unaffected