Text of the Economics Honors Quiz 1 Review

What traditionally happens to unemployment and poverty rates during a contraction or recession?

They rise

What is the basic definition of an unemployed person?

someone who wishes to work but cannot find a job

Identify three types of unemployment.

frictional (moving from job to job), structural (change in technology), seasonal, & cyclical (tied to business cycle)

How do many workers in seasonal industries solve the problem of seasonal unemployment?

By migrating to areas that have work at that time (areas in season)

Name three of the five causes of structural unemployment.

Development of new technology, discovery of new resources, changes in demand, globalization, lack of education

Fiscal Policy is built around the supply of public goods, such as _____, ______, and _____.

Schools, roads, national defense, fire/police protection, national parks

What type of employment are we most worried about right now?  Why?

Cyclical, because we won’t get relief until the economy recovers

How is the unemployment rate computed?

Total number of unemployed people divided by total workforce (all Americans over 16 who want to work)

Where does the unemployment rate hover when we are experiencing full employment?

Between 4-6%

What does the government do to help support unemployed workers?  How do they pay for this?

Provide unemployment benefits for people actively looking for work; payroll taxes paid by current workers

What does it mean to be underemployed?  Does underemployment increase efficiency?

in a job that does not use all of your skills, or gives you part-time when you want full time

In what decade did labor unions in the US first begin to win legal rights and recognition?  What law was behind this change?


Wagner Act

What is collective bargaining?

The negotiation between a company’s management and union to reach agreement on a new contract

What are three factors considered by workers as they enter the labor force?

wages, needed skills, working conditions, location, intrinsic rewards, market trends

What are two of the key changes in the labor force over the last century?

more women, more capital intensive economy, higher overall education level

What is the theory that a college education increases productivity and results in higher wages?

Learning Effect

What is the theory that a person who completes a college degree is intelligent and hardworking?

Screening Effect

What are the two key types of laws governments passed in the last 50 years to protect workers?

anti-discrimination and minimum wage laws

What was the first large scale union in the United States?  Who did it attempt to organize?

Knights of Labor, all workers

What was the first relatively successful union in the United States? Who did it attempt to organize?

American Federation of Labor (AFL), skilled workers

Which national union sought to organize workers across entire industries?


A law that bans the mandatory union membership

Right-to-work laws

What are two of the main benefits of a sole proprietorship?

ease of start up, full personal control, exclusive right to the profits

What are three of the disadvantages of a sole proprietorship?

unlimited liability, sole responsibility, limited growth potential, lack of longevity

What are two advantages of partnerships?

easy start up, specialization, shared decision making, shared losses

What are two disadvantages of partnership?

unlimited liability, potential for conflict, lack of longevity

What is a horizontal corporate combination? A vertical combination?

horizontal: all in same phase of production, vertical: all in different phases of production

What is the name for a group of businesses that share a name and product line but are individually owned?


What is a cooperative?

a business that is owned by its customers (REI, the Green Bay Packers)

What are three advantages of a Franchise?

Standardized quality, national advertising, financial assistance, management training

What are three disadvantages of a Franchise?

High franchising fees, strict operating standards, only buy supplies from parent company, can only sell approved products

Who owns a corporation?  Who do they elect?

Shareholders, board of directors

What are factors that contributed to the decline of the labor union?

Decrease of manufacturing jobs, increase of white-collar jobs, industries move to South, more women in labor force

When the union negotiates with the management is

Collective Bargaining

What are two of the biggest challenges unions face?

employer opposition, changing employment patterns, negative public opinion

What are the 3 key types of inflation?

demand-pull (aggregate demand pulling prices up), cost-push and quantity theory

What are the three most commonly used statistics for measuring the current state of the economy?

GDP, unemployment, and the CPI (inflation)

What kind of inflation is created by increased production costs?


What theory of inflation is based on an increase in the money supply?

Quantity Theory

What kind of inflation is created by greater aggregate demand?


What is the most commonly used measure of inflation? How is it calculated?

Consumer Price Index (CPI); tracking the prices of a consistent “market basket” of goods

What is the normal range for inflation rates?  What caused the huge jump in inflation in the late 1970s?


A huge jump in food and oil prices

What does the core inflation rate measure?  Why?

Inflation rate without energy & food prices; because energy & food prices are the most volatile

What are three of the main effects of inflation?

decreased purchasing power, decreased value of wages, increased interest rates, decreased saving, increased production costs

What is the typical effect of low unemployment on inflation?  Why?

Low unemployment leads to higher wages which usually creates inflation through higher aggregate demand

Name three of the main causes of poverty.

Lack of education, Location, racial and gender discrimination, economic shifts, shifts in family structure

What is the poverty line? What does the poverty rate measure?

The minimum income needed to satisfy basic economic needs; the percentage of people in a nation living under the poverty line

What does a Lorenz curve demonstrate?

The income gap, or disparity in wealth holdings by percentages of the population

What type of household is most likely to live in poverty?

Households headed by a female single parent

The wealthiest fifth of Americans receives roughly what percentage of total income?  The poorest fifth?

Almost 50%; less than 5%

What are two reasons for  this income gap?

Differences in skills and education, inheritances, field of work

What is shift is currently taking place in the income gap?

It is getting larger, wealthiest Americans getting richer – everybody else getting poorer

What is the purpose of enterprise zones?

provide tax breaks and other incentives to encourage investment in areas that need revitalization

What catch phrase demonstrates the recent efforts to reform welfare programs?

From welfare to workfare

Name two ways that the United States Constitution has been amended.

2/3 Congress & ¾ State Legislatures, 2/3 Congress & ¾ State Conventions

The process of amending the Constitution is a great example of ______ism.  Why?

Federalism J

Because of the interaction of federal and state

What is the primary goal of monetary policy?

To manage the economy by manipulating the money supply

What are the three primary tools used in carrying out monetary policy?

Adjusting key interest rates, adjusting reserve requirements for banks, buying/selling government securities

What impact would lower interest rates have on the amount of consumer borrowing? How should this effect the economy?

Increase borrowing

Stimulate the economy

Who has the primary responsibility for setting monetary policy in the U.S.?  What is the purpose of monetary policy?

The Federal Reserve Board

(the FED)

Lessen the impact of business cycles on the American economy

Which FED chairman was given guru status in the 1990s?  Who is the current FED chairman?

Alan Greenspan

Ben Bernanke

Who appoints the members of the FED governing board?  Once appointed, are they dependent or independent in terms of political pressure?

The President

The FED operates independently from political pressure

Through what type of policy does the government attempt to influence the economy by taxing and spending?

Fiscal Policy

How do “supply-side” economists view tax cuts?  “Demand side”?

Tax cuts can be helpful in increasing spendable income and aggregate demand;

Demand side favors spending to increase economic activity and therefore gov’t revenue

Roughly what percentage of the federal budget is left after entitlements, interest, and defense?


What statistic is the best measure of a nation’s standard of living and economic output?  Why?

GDP per capita

It shows productivity and wealth per person