Question 1

Which of the following best describes potential GDP?

Accepted Answer

The value of real GDP when all the economy’s factors of production are fully employed.

Question 2

According to the production function, what happens as more labor is employed, holding all other factors constant?

Accepted Answer

Each additional hour of labor produces successively smaller additional amounts of real GDP (diminishing returns).

Question 3

If the real wage rate increases, what is the expected effect on the quantity of labor supplied?

Accepted Answer

The quantity of labor supplied increases.

Question 4

Which of the following is NOT a reason why the real wage rate might be set above the full-employment equilibrium level?

Accepted Answer

A decrease in the labor force participation rate.

Question 5

Suppose the government increases unemployment benefits. What is the likely effect on the natural unemployment rate?

Accepted Answer

The natural unemployment rate increases because people search for jobs longer.

Question 6

Which school of macroeconomic thought argues that the market economy is inherently unstable and requires government intervention to achieve full employment?

Accepted Answer

Keynesian macroeconomics

Question 7

Given the production function $$Y = PF(L)$$, where $$Y is $$real GDP and $$L is $$labor, what does the curve represent?

Accepted Answer

The maximum attainable real GDP for each level of labor employed, holding other factors constant.

Question 8

If the equilibrium real wage rate is $$50 per hour and the full-employment quantity of labor is 200 billion hours per year, what is the potential GDP if the production function gives Y = 20$ trillion at this labor input?

Accepted Answer

$$20$$ trillion

Question 9

Which of the following would shift the labor supply curve to the left?

Accepted Answer

An increase in income taxes

Question 10

If a country’s labor is more productive due to higher capital per worker and better technology, what is the likely effect on its demand for labor curve?

Accepted Answer

The demand for labor curve shifts to the right.

Question 11

Suppose the government sets a minimum wage above the equilibrium wage rate. What is the likely result in the labor market?

Accepted Answer

A surplus of labor (unemployment)

Question 12

Which of the following best explains why Americans work longer hours than Europeans, according to the study materials?

Accepted Answer

The U.S. supply of labor lies to the right of the European supply due to lower income taxes and unemployment benefits.

Question 13

Which of the following is a direct effect of job rationing in the labor market?

Accepted Answer

The natural unemployment rate increases.

Question 14

If the real wage rate is set at $$60 per hour, above the equilibrium of 50 $$per hour, and the quantity of labor supplied is 240 billion hours while the quantity demanded is 175 billion hours, what is the level of unemployment caused by this wage policy?

Accepted Answer

$$65$$ billion hours (240 - 175)

Question 15

Which of the following statements about the three main schools of macroeconomic thought is correct?

Accepted Answer

Monetarists believe that fluctuations in the quantity of money generate the business cycle.

Question 16

A country experiences a technological boom that increases the productivity of labor. What is the likely effect on potential GDP?

Accepted Answer

Potential GDP increases.

Question 17

If the labor market is in equilibrium, which of the following is true?

Accepted Answer

The quantity of labor demanded equals the quantity of labor supplied.

Question 18

Which of the following would most likely increase the natural unemployment rate?

Accepted Answer

An increase in the efficiency wage paid by firms.

Question 19

If the production function for a country is above that of another country for all levels of labor, what does this imply?

Accepted Answer

The first country has higher productivity and a higher potential GDP.

Question 20

Suppose a country experiences an increase in the proportion of its population that is of working age. What is the likely short-term effect on the unemployment rate?

Accepted Answer

The unemployment rate increases due to higher entry into the labor force.

Potential GDP and the Natural Unemployment Rate: Macroeconomic Foundations and Labor Market Dynamics

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