1. The unemployment rate and employment both go up. Ellen says that it is not possible for both to rise
at the same time. Is Ellen correct or incorrect? Why? Ellen is incorrect. If more people enter the labor
force and most of them do not find jobs, both employment and unemployment rates will rise.
2. True, false or uncertain, and explain why? “Gross domestic product measures the amount of wealth in
the economy.” False. GDP measures a stream of production or income in a particular year or time
period. Wealth includes the current value of goods and services produced in past years.
3. True, false or uncertain, and explain why? “A decrease in gross domestic product must reduce a
person’s standard of living.” False. GDP measures the production of the nation. Even during recessions,
many people’s real incomes rise.
4. True, false or uncertain, and explain why? “If nominal GDP increases by 5 percent and the price level
increases by 7 percent, real GDP has decreased.” True. Real GDP would fall by about 2 percent because
the inflation rate is higher than the rate of growth in nominal GDP.
5. True, false or uncertain, and explain why? “In preparing an index of prices, it is important that all
commodities entering the index be given equal weight.” False. Commodities should enter the index with
the weight that represents the proportion the item represents in people’s actual pattern of consumption
or use. Different groups have different consumption patterns. An index cannot capture everyone’s cost
of living.
6. True, false or uncertain, and explain why? “Frictional and structural unemployment are two words for
the same thing.” False. Structural unemployment occurs because people do not have the skills necessary
for the jobs available. Frictional unemployment occurs when people are between jobs. They will find
employment, but it will take time to match them with job vacancies.
7. Why does unanticipated inflation help borrowers and hurt lenders? Borrowers pay back a fixed
number of dollars, but these dollars are worth less. This means that the purchasing power of the dollars
that lenders receive is lower than the purchasing power of the dollars in the original loan. If the loan has
a variable interest rate and inflation causes nominal interest rates to rise, the lender will not be hurt as
badly because the lender can raise the interest rate on the loan.
8. True, false or uncertain, and explain why? “Inflation always increases when unemployment
decreases.” False. Although this is sometimes the case, look at the data in Activity 17 to illustrate that
this is not always true. During 1983q2 to 1987q1, the unemployment rate was decreasing and inflation
was highly variable.
9. True, false or uncertain, and explain why? “If the economy is at full employment, the unemployment
rate is zero.” False. At full employment, we have frictional and structural unemployment. Frictional
unemployment occurs when people are between jobs; structural unemployment occurs when people do
not have the skills for the jobs that are available.
10. True, false, or uncertain, and explain why. “Seasonal unemployment is a continual worry because
some people are out of work on a regular basis.” Uncertain. For the seasonally unemployed person it
can be a worry. However, stimulating the economy may not change the situation. Seasonal workers are
people who work only during particular seasons of the year such as Christmas time or harvest time.