ECON 102 Quiz 3

ECON 102 Quiz 3. 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 This study source was downloaded by from CourseH on :23:43 GMT -06:00 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 x11+3=14 and y8-3=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: