Select the only correct answer for each multiple choice question.

Suppose a person quits their job in search of a better one but before the worker finds a new job the economy slips into a severe recession.

• This person was frictionally unemployed and then became cyclically unemployed when the economy slipped into a recession.
• This person was structurally unemployed and then became cyclically unemployed when the economy slipped into a recession.
• This person was cyclically unemployed and then became structurally unemployed when the economy slipped into a recession.
• This person was cyclically unemployed and then became frictionally unemployed when the economy slipped into a recession.

c.Unemployment is an economic problem because

• there are costs of moving for unemployed persons.
• a unit of labour resource that could be engaged in production is sitting idle.
• unemployment benefits are paid.
• there are additional expenses of helping unemployed family members.

d.The consequence of a negative GDP gap is that

• society must forgo goods and services that were not produced because some resources were involuntarily idle.
• parents will not be able to afford to pay for their children to go away to university.
• because it is not self-correcting only government intervention or new public policy can close the gap.
• interest rates will fall and as a result savings will also fall leading to lower investment and lower future GDP.

e.The non-economic effects of unemployment include

• the loss of skills and self-respect, family disintegration, poor morale and sociopolitical unrest diven by idleness.
• increased rates of physical and mental illness as well as death (by suicide, homicide, heart attacks, and strokes).
• increased poverty, heightened racial and ethnic tensions, and reduced hope for material advancement that can lead to rapid and sometimes violent social and political change.
• all of the effects listed here can be linked to various levels of unemployment in a society.

The actual multiplier for the Canadian economy is smaller than the multiplier in this chapter's simple examples because it

• includes other leakages from the spending and income cycle besides just saving.
• includes other leakages from the spending and income cycle besides just spending.
• is calculated based on the average propensity to consume, not the marginal propensity to consume.
• is corrected for inflation.

a.Consider the multiplier effect. The relationship between changes in spending and changes in real GDP is

• an inverse relationship.
• a direct relationship.
• a neutral relationship.
• an indirect relationship.

b.When the multiplier is

• smaller, the MPC must be larger and the MPS smaller because the multiplier = 1/ (1-MPS).
• smaller, the MPC must be smaller and the MPS smaller because the multiplier = 1/(1-MPC).
• larger, the MPC must be smaller and the MPS larger because the multiplier = 1/(1-MPS).
• larger, the MPC must be larger and the MPS smaller because the multiplier = 1/ (1-MPC).

c.We see an increase in the multiplier when the MPC increases because a higher MPC implies that

• the initial change in spending will result in lower marginal consumption spending at each stage of the expansion process and in a smaller change in real GDP
• the final change in saving will result in greater consumption possibilities after each stage of the expansion process and in a smaller change in real GDP.
• the initial change in spending will result in higher consumption spending at each stage of the expansion process and in a larger change in real GDP.
• the final change in spending will result in higher saving after each stage of the expansion process and a larger change in real GDP.

In a period in which real interest rates are rising, it's possible for investment spending to increase if

• expected rates of return rise faster than real interest rates.
• expected rates of return rise slower than real interest rates.
• actual rates of return rise faster than real interest rates.
• average rates of return rise slower than real interest rates.