Chapter 6

Practice Quiz
Business Cycles and Unemployment
1. The phases of a business cycle are
a. upswing and downswing.
b. full employment and unemployment.
c. peak, recession, trough, and recovery.
d. full employment, depression, expansion, and plateau.
ANS:
c. These are the four phases of changes in real GDP which mirrors changes in
employment and other key measures of the macro economy.
2. The phase of a business cycle during which real GDP reaches its minimum level is the
a. recession.
b. depression.
c. recovery.
d. trough.
ANS:
d. Recession is the phase during which real GDP fall and recovery is the phase during
which real GDP rises. Depression is an historical reference to the deep and long
recession of the early 1930s.
3. Which of the following is not a variable in the index of leading indicators?
a. New consumer goods orders
b. Delayed deliveries
c. New building permits
d. Prime rate
ANS:
d. The prime rate is a lagging indicator.
4. Which of the following is a coincident indicator?
a. Personal income
b. Industrial production
c. Manufacturing and trade sales
d. All of the above
ANS:

d. All of these answers will change at the same time that real GDP changes.
5. The labor force consists of all persons
a. 21 years of age and older.
b. 21 years of age and older who are working.
c. 16 years of age and older.
d. 16 years of age and older who are working or actively seeking work.
ANS:
d. The labor force also includes the armed forces, but excludes the category called
persons not in labor force.
6. People who are not working will be counted as employed if they are
a. on vacation.
b. absent from their job because of bad weather.
c. absent from their job because of a labor dispute.
d. all of the above.
ANS:
d. A person who works at least 1 hour per week for pay or at least 15 hours per week as
an unpaid worker in a family business is counted as employed regardless of the special
situations listed in the other questions.
7. The number of people officially unemployed is not the same as the number of people
who cant find a job because
a. people who have jobs continue to look for better ones.
b. the armed forces are included.
c. discouraged workers are not counted.
d. of all of the above.
ANS:
c. A person can quit looking for a job because he is discouraged after trying to find one,
but wants to work if he could find a job, yet this person is not considered unemployed
because he is not actively seeking employment.
8. Frictional unemployment applies to
a. workers with skills not required for existing jobs.
b. short periods of unemployment needed to match jobs and job seekers.
c. people who spend long periods of time out of work.
d. unemployment related to the ups and downs of the business cycle.
ANS:

b. Frictional unemployment includes people changing jobs, initially entering the labor
force, or re-entering the labor force.
9. Structural unemployment is caused by
a. shifts in the economy that make certain job skills obsolete.
b. temporary layoffs in industries such as construction.
c. the impact of the business cycle on job opportunities.
d. short-term changes in the economy.
ANS:
a. Structural unemployment is long-term unemployment because the skills of
unemployed workers do not match the skills required for existing jobs.
10. Unemployment that is due to a recession is
a. involuntary unemployment.
b. frictional unemployment.
c. structural unemployment.
d. cyclical unemployment.
ANS:
d. Only cyclical unemployment is attributable directly to the business cycle.
11. The sum of the frictional and structural unemployment rates is equal to the
a. potential unemployment rate.
b. actual unemployment.
c. cyclical unemployment rate.
d. full employment unemployment rate.
ANS:
d. Full employment does not mean zero unemployment. Even in the best times, there is
always frictional and structural unemployment.
12. Which of the following statements is true?
a. The four phases of the business cycle, in order, are peak, recovery, trough, and
recession.
b. When unemployment is rising, then real GDP is rising.
c. The economic problem typically associated with a recovery is rising unemployment.
d. Full employment exists in an economy when the unemployment rate equals the sum of
frictional and structural unemployment rates.
ANS:
d. There will always be some people looking for work.

13. Which of the following groups typically has the highest unemployment rate?
a. White men and women as a group
b. African-American men and women as a group
c. Teenagers
d. Persons who completed high school
ANS:
c. See Exhibit 10 in the text.
14. Which of the following is true?
a. The GDP gap is the difference between full employment real GDP and actual real GDP.
b. We desire economic growth because it increases the nations real GDP.
c. Economic growth is measured by the annual percentage increase in a nations real
GDP.
d. Discouraged workers are a reason critics say the unemployment rate is understated.
e. All of the above are true.
ANS:
e. Each of the above answers is correct.
15. The economy is considered to be at full employment when
a. the actual rate of unemployment is less than the natural rate.
b. the leading economic indicators are unchanged for two consecutive quarters.
c. structural unemployment is zero.
d. frictional plus structural unemployment is less than the natural rate.
e. the rate of cyclical unemployment is zero.
ANS:
e. At full employment only frictional and structural unemployment exist.