Test Paper 4

Directions: Study the passage below carefully and answer the questions that follow.


Unemployment is an important index of economic slack and lost output, but it is much more than that. For the unemployed person, it is often a damaging affront to human dignity, and sometimes a catastrophic blow to family life. Nor is this cost distributed in proportion to ability to bear it. It falls more heavily on the young, the semi-skilled, the unskilled, the black person, the older worker, and the underemployed person in the low income rural area who is denied the option of securing more rewarding urban employment.

The concentrated incident of unemployment among specific groups in the population means far greater cost to society than can be measured simply in hours of involuntary idleness or dollars of income lost. The extra costs include disruption of the careers of the young people, increased juvenile delinquency, and perpetuation of conditions which breed racial discrimination in employment and otherwise deny equality of opportunity. There is another and more subtle cost. The social and economic strains of prolonged underutilization create strong pressures for cost increasing solutions. On the side of labour, prolonged high unemployment leads to ‘share-the-work’ pressure for shorter hours, intensifies resistance to technological change and to rationalization of work rules, and, in general, increases incentives for restrictive and inefficient measures to protect existing jobs. On the side of business, the weakness of markets leads to attempts to raise prices to cover high average overhead costs and to pressures for protection against foreign and domestic competition. On the side of agriculture, higher prices are necessary to achieve income objective when urban and industrial demand for foods and fibres is depressed and lack of opportunities for jobs and higher incomes in industry keep people on the farm.

In all these cases, the problems are real and the claims understandable. But the solutions suggested raise costs and promotes inefficiency. By no means the least of the advantages of full utilization will be a diminution of these pressures. They will be weaker, and they can be more firmly resisted in good conscience, when markets are generally strong and job opportunities are plentiful. The demand for labour is derived from the demand for goods and services which labour participate in producing. Thus, unemployment will be reduced to 4% of the labour force only when the demand for the myriad of goods and services……., automobiles, clothing, food, haircut, and so on……. Is sufficiently great in total to require the productive efforts of 96% of the civilian labour force. Although many goods are initially produced as materials or components to meet demands related to the further production of other goods, all goods (and services) are ultimately destined to satisfy demands that can, for convenience, be classified into four categories: consumer demand, business demand for new plants and machinery, and for additions to inventory, net export demand of foreign buyers, and demand of government units, (federal, state and local). Thus Gross National Product (GNP), our total output, is the sum of four Major components of expenditure; personal consumption expenditures, gross private domestic investment, net exports, and government purchases of goods and services. The primary line of attack on the problem of unemployment must be through measures which will expand one or more of these components of demand. Once a satisfactory level of employment has been achieved in a growing economy, economic stability requires the maintenance of a continuing balance between growing productive capacity and growing demand. Action to expand demand is called for not only when demand actually declines and recession appears but even when the rate of growth of demand falls short of the rate of growth of capacity.

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