Principles of Economics
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Economics 110
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Mr. Beck
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SUNY College at Oneonta
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Chapter 24 Solutions
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Questions for Economics 110
1. Frictionally unemployed
workers are workers who become unemployed due to the normal functioning
of the labor market. A loss of one's job due to relocation falls into this
category. The correct answer is a.
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1
2. A "discouraged worker" is someone who is no longer
actively seeking employment, most likely because of unavailability of jobs.
Since he/she is without a job and is not actively looking, he/she is officially
not counted and is considered to have dropped out
of the labor force, choice c.
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3. Inflation reduces the real value of one's debt
because the debt is fixed in $ terms. As inflation reduces the value of
the $, it makes it easier for debtors (borrowers)
to pay off their debts. The correct choice is a.
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4. Structurally unemployed
workers are workers unemployed because production changes over time
as new products are introduced. As a result, some workers' skills
may become outdated and no longer in demand. The correct choice is b.
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5. A recession is a downturn in the economy's business
cycle in which production and employment fall. As such, unemployment resulting
from the occurrence of a recession is referred to as cyclical
unemployment, choice c.
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6. A worker who stops looking for a job because there are no jobs available
is a discouraged worker
who has temporarily dropped out of the labor force.
A worker who is unable to
obtain employment (while actively seeking employment) because of a recession
is cyclically
unemployed.
The correct choice is b.
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7. In a severe recession, jobs become scarce.
Some workers, aware that there are no jobs available, stop actively seeking
employment and temporarily drop out of the labor force. By dropping out
of the labor force, these workers are not officially counted as unemployed.
These discouraged workers
are unofficially unemployed. The official unemployment rate (which does
increase because of the increase in cyclical unemployment) therefore understates
the true unemployment % in a recession because it is in a recession when
the number of these discouraged workers greatly increases.
The correct choice is c.
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8.A worker who is unable to obtain employment
(while actively seeking employment) because of a recession is cyclically
unemployed.
A worker who stops
looking for a job because there are no jobs available is a discouraged
worker who has temporarily dropped out of
the labor force.
The correct choice is f,
Ms. Carner is cyclically unemployed in 1990
and a discouraged worker in 1991.
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9. A recession is characterized by cyclical unemployment.
As the economy recovers and jobs once again become available, cyclical
unemployment decreases. The correct choice
is c.
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10. A worker who becomes unemployed because his job skills
are outdated is considered structurally unemployed.
A worker who stops
looking for a job because there are no jobs available is a discouraged
worker who has temporarily dropped out of
the labor force.
The correct choice is b,
Mr. Waters is structurally unemployed
in 1992 and a discouraged worker
in 1993.
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11. If someone loses his job because his job skills are outdated
and no longer in demand, he is considered structurally unemployed.
When unemployment is the result of a slowdown in economic activity
caused by a recession, the unemployed person is considered cyclically unemployed.
A downturn in the business cycle causes employers to lay off workers, thereby
increasing
unemployment.
The correct choice is b. Mr. Hopkins is
structurally
unemployed in 1996 and cyclically unemployed in 2001.
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12. Disposable Income (DI) = Income (Y) - Net Taxes (T)
[Net taxes (T) = Taxes - Transfer Payments]
If someone were to become unemployed, he would lose his $1,000 a week
earnings.
However, he would become eligible for unemployment compensation, a
government transfer payment. Transfer payments are negative taxes (instead
of you paying the government taxes, the government pays you a weekly amount
while you are unemployed.) As a result of this government transfer payment,
his weekly disposable (take-home) income would not decrease by nearly as
much as $1,000, the amount of weekly salary lost.
For example, assume someone is earning $1,000 per week and is neither
paying taxes nor receiving transfer payments. In this case, both his income
and disposable (take-home) income would be the same $1,000. He then loses
his job, but becomes eligible for $400 weekly unemployment compensation
(a government transfer payment). His disposable income would only decrease
by $600 (from the previous $1,000 salary to $400, the amount of the weekly
transfer payment.)
The correct answer is e, his weekly disposable
income (DI) would decrease by less than $1,000 because
his transfer payments would increase.
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13. If someone loses his job because his family relocates to a different
part of the country, this is considered frictional unemployment, temporary
unemployment which might exist until he is able to find a job in his new
location.
However, unemployment because the economy goes into
a recession is referred to as cyclical unemployment, the loss of one's
job because of deteriorating economic conditions (downturns in the economy's
business cycle). For many workers, this unemployment may last until the
overall economy improves and business hiring resumes.
The correct choice is d.
Mr. Bridges is frictionally unemployed in 1998 and
cyclically unemployed in 2001.
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14. Disposable Income (DI) = Income (Y) - Net Taxes (T)
[Net taxes (T) = Taxes - Transfer Payments]
In this example, when a worker who was earning $1,000
per week becomes unemployed, their income (earnings) are reduced by $1,000
(from $1,000 to 0). However, they become eligible for $750 (=75% of his
lost wages of $1,000) of unemployment compensation (insurance). This $750
of unemployment compensation replaces all but $250 of the worker's lost
wages. The worker's disposable income decreases by
$250 (choice d) from $1,000 to $750.
The worker's income (wage earnings) has decreased by
$1,000, but their net taxes have decreased by $750. ($750 of transfer payments
represent negative net taxes.) Therefore, their net decrease in disposable
income is only $250.
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15. Unexpectedly rapid inflation reduces the real (purchasing power)
value of the dollar. Debtors (borrowers) who are required to pay back their
loans in dollars will find it easier to do so because they are actually
paying back fewer "real" dollars. The purchasing power of the dollars they
pay back will be less than the purchasing power of the dollars they originally
borrowed. Unexpectedly rapid inflation therefore redistributes income in
favor of debtors (borrowers) at the expense of lenders (who receive back
fewer "real" dollars than they lent). The correct choice is b.
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15
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