Econ102 Quiz 3 -Spring 08SolutionsUpdated

Econ102 Quiz 3 -Spring 08SolutionsUpdated - EC102 Quiz 3...

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EC102 Quiz 3 Elena Quercioli March 12th, 2008 On this day in 1876 , Alexander Graham Bell successfully speaks the first words on a telephone by calling for his assistant: “Mr. Watson, come here!” (His second words were: “My bill is THAT much? No way!”) Clearly indicate a first choice and a second choice. If your first choice is right, you get 7 points. If your second choice is right, you get 2 points. If both are wrong, you get 0. If you are unsure, guessing is your best option. 1) Suppose that the real return on assets is 4% forever. Approximately what is it worth to have a gift from your grandparents when you are young that pays $2000 a year until you die: a. About $2,000 b. About $5,000; c. About $120,000 if you expect to live for another 60 years; d. About $20,000 e. About $8,000 f. About $50,000 Solution: The present value of the sum of all money to be received in the future on this “perpetuity” is given by $2,000 / 0.04 = $50,000 2) According to the Beveridge curve, what are possible values for x,y below? Vacancy rate 5% 7% 9% 11% Unemployment rate x% 11% 8% Y% a. x=17 and y=3 b. x=13 and y=6 c. x=16 and y=4 d. x=13 and y=4
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e. x=16 and y=3 f. x=15 and y=6 g. x=12 and y=6 Solution: We have argued that there is diminishing returns to additional irons in the fire. Namely, the gains in lower unemployment rates as the vacancy rate rises from 5% to 7% to 9% to 11% must fall. Since the middle two gains are 11% and 8%, we need x>11+3=14 and y>8-3=5 ]3) Suppose that NASA finds that an asteroid is on a collision course to destroy the earth. In case A, it will hit next year and in case B, it will hit in two years. The one year interest rates will: a. …fall a lot in case A and even more in case B b. …fall a lot in case B and even more in case A c. …rise a lot in case A and even more in case B d. …rise a lot in case B and even more in case A e. …be unchanged f. …be unaffected in case A and falls in case B g. …be unaffected in case A and rises in case B Solution: Suppose the world ends next year (case A) and in two years time (case B). The one year interest rates will jump up in case B. Intuitively if there is no future, the value of postponing consumption today for consumption tomorrow (ie the value of saving) is really low, and therefore I must be very highly compensated (high interest rates) to make me willing to do so. 4) On Tuesday, European regulators
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Econ102 Quiz 3 -Spring 08SolutionsUpdated - EC102 Quiz 3...

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