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Free CFA-Level-I Exam Braindumps (page: 338)

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When the number of discouraged workers increases during a severe recession,

  1. the measured unemployment tends to overstate the severity of the unemployment problem.
  2. the measured unemployment tends to understate the severity of the unemployment problem.
  3. frictional unemployment will rise.
  4. the natural unemployment will decline.

Answer(s): B

Explanation:

Persons who have given up searching for employment because they believe additional job search would be fruitless are termed discouraged workers. Because they are not current searching for work, they are not counted among the unemployed. As a result, the number of unemployed workers will be understated since unemployed individuals will drop out of the labor force and thus not be counted as unemployed.



The chairman of the House Ways and Means committee, who has major sway on spending programs, has been researching the economy and believes that the nation is heading for an inflationary spiral. Inflation is

currently not considered a problem. He proposes a fiscal policy solution. Which of the following would not impede his proposition from alleviating the problem?

  1. congressional opposition to spending cuts
    II.difficulty determining the degree of spending cuts required III.correctly choosing between tax hikes and spending cuts
    IV.impact lag
  2. recognition lag
  3. III, IV
  4. I, II, IV, V
  5. II, IV, V
  6. II, IV
  7. I, II, III, IV, V
  8. I, II, V

Answer(s): B

Explanation:

I, II, IV, and V are classic problems with fiscal policy. III is incorrect because in terms of fiscal policy tax or spending measures are interchangeable.



An economy is currently in equilibrium at full employment. If there is an unanticipated decrease in demand, the employment rate in the short run:

  1. will increase.
  2. will remain unaffected but wages will decrease.
  3. will rise above the natural rate.
  4. none of these answers.

Answer(s): D

Explanation:

If there is an unanticipated decrease in demand, the demand curve will move to the left. The supply curve will not move in the short run since the demand cut-back is unanticipated. This will lead to a decrease in the employment rate and a fall in real GDP. Prices will also fall as a result of decreased demand.



Seeing that the unemployment rate is reaching new highs each month, several Senators group together to propose major tax cuts and spending increases to stimulate the economy. Both the increased spending and tax cuts will be implemented in the following January, more than six months away. Due to major public outcry, these bills pass through legislature very quickly. During the six months in between passage and implementation, the unemployment rate begins to fall. Another year passes, now 18 months after the bill was first passed, and the economy is suffering from significant inflation. What problem(s) with fiscal policy does this illustrate?

  1. recognition lag
    II. impact lag
    III. crowding out effect
    IV. rational expectations
  2. I, II, III, IV
  3. I, II, III
  4. I only
  5. II only
  6. I, II
  7. III, IV

Answer(s): E

Explanation:

In this case, tax cuts and spending increases took approximately six months to enact. However, illustrating the recognition lag, by the time six months had passed, the economy was recovering. One year later, the economy is suffering from inflation. This is due to the fact that fiscal policy takes time to have its full impact, or impact lag.
By the time the full impact was realized, the economy had recovered, and the fiscal stimulus caused inflation.






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