Aplia set 6 and non-aplia

Un Type Rate(%) Frictional 3.9 Cyclical 0.0 Structural 1.1 Total un. 5.0 True or False: This economy is currently at its natural rate of unemployment.

True Total unemployment is the sum of frictional, structural, and cyclical unemployment. If there is no cyclical unemployment, the economy is at its natural rate of unemployment, equal to the sum of frictional and structural unemployment. In this case, because cyclical unemployment is 0.0%, the economy is at its natural rate of unemployment.

The official unemployment rate and the U-4 measure of labor underutilization are two different measures of joblessness in the economy. If the Bureau of Labor Statistics were to include discouraged workers in the official unemployment rate, the reported unemployment rate would ______

Increase

Suppose the government wants to reduce this type of unemployment. Which of the following policies would help achieve this goal? Check all that apply. -Offering recipients of unemployment insurance benefits a cash bonus if they find a new job within a specified number of weeks -Improving a widely used job-search website so that it matches workers to job vacancies more effectively -Increasing the benefits offered to unemployed workers through the government's unemployment insurance program

#1, 2 Unemployment benefits tend to reduce the job-search efforts of the unemployed. Workers receiving unemployment insurance generally take longer to find new work, contributing to frictional unemployment in the interim. Extending or increasing unemployment benefits will contribute to additional frictional unemployment. Note that unemployment insurance is not necessarily bad. Preventing some hardship associated with unemployment may be well worth the cost of some additional frictional unemployment. Reducing the average amount of time spent searching for a job would lower an economy's frictional unemployment and, by extension, its natural rate of unemployment. Job-search websites can connect unemployed workers to firms with job vacancies. A site that matches workers to vacancies more effectively would reduce the amount of time that workers spend looking for jobs and allow employers to fill vacancies more quickly. Government-run employment agencies connect unemployed workers to firms in need of additional labor. Employment bonuses given to unemployed workers who are receiving unemployment insurance benefits would give workers an incentive to find work more quickly. This would reduce frictional unemployment by decreasing the time the unemployed take to find work.

Which of the following statements correctly describe discouraged workers? (If none of the choices apply, leave all of the checkboxes blank.) Check all that apply. -They have given up on looking for a job. -They are employed workers who want to earn higher wages. -They have not looked for a job in 4 weeks (or longer), but they would like a job and are available for work. -They are counted as part of the labor force by the Bureau of Labor Statistics.

#1, 3 Any jobless person who has not looked for work in the past 4 weeks is not in the labor force according to the Bureau of Labor Statistics (BLS). Some of these jobless people who are not in the labor force indicate that they'd like to have a job and are available for work. The BLS classifies such people as marginally attached workers. Discouraged workers are marginally attached workers who give a job-market-related reason for giving up on their job search. Typically, discouraged workers give up on their search because they feel that there are no current opportunities for them in the labor market.

Why might some firms voluntarily pay workers a wage above the market equilibrium, even in the presence of surplus labor? Check all that apply. -Paying higher wages tends to reduce the average experience level of a firm's workers. -Higher wages attract a more competent pool of workers. -Higher wages cause workers to shirk more of their responsibilities. -Paying higher wages encourages workers to be more productive.

#2,4

1. what is the labor force participation rate of this economy of six people? 2. what is the unemployment rate of this economy of six people?

1. 60% 2. 33.3%

Suppose you currently own a one-year zero bond issued by the US government. The current price of the bond is $951.45. Your next best alternative is 3%. Given this information do you buy more of this bond or do you sell the bond you already own? Explain in words and mathematics.

Remember the face value of a bond is par value, which is $1000. You should buy more of these bonds since a one year zero selling for $951.45 has internal rate of return of IRR = ($1000 - $951.45)/ $951.45 = 0.051027379 = 5.10% which exceeds the 3% return at your bank.

There are three savers: Janey, Jimmy and Jonny. They all own the same one-year US Gov't bond that yields a coupon of $100 and is selling for par value. Janey's required return to hold the bond is 8%, Jimmy's required return to hold the bond is 10% and Jonny's required return to hold the bond is 11%. Which of the following is correct? Explain your answer using words and any appropriate mathematics. A. Janey and Jonny sell the bond; Jimmy buys the bond B. All three sell the bond C. Janey buys the bond; Jonny sells the bond and Jimmy is indifferent to buying or selling the bond. D. All three sell the bond.

The IRR on the bond is 10% = (FV + C - Pbond)/Pbond = $100/$1000. Since Janey requires a return of 8% to hold the bond it is a good deal for her and she buys more of these bonds. Jonny requires 11% return so an IRR = 10% is not sufficient to convince him to hold the bond and so he sells his bonds. Jonny requires 10% to hold the bond, which is exactly the IRR of the bond so he is indifferent to buying more bonds or selling his bonds.

Warren Buffet, the second or third richest man in the world, has earned a 20% average annual rate of return for over 50 years. Explain why the following is false: since a 20% return is well above the normal rate of return, the existence of Warren Buffet disproves the efficient market hypothesis.

the efficient market hypothesis states that one cannot expect to earn sustained above normal returns using public information without taking on additional risk. Notice that the EMH does not say nobody can earn above normal returns, only that, one cannot expect to earn above normal returns, they cannot be sustained, they cannot be based on public information, and they are not possible without taking on additional risk. Buffet may have taken on greater risk, or may trade on information that the public does not have access to. Of course, Buffet may just be lucky; the EMH does rule out being lucky - it says you cannot expect to be lucky!

-Suppose the world price of cotton falls substantially. The demand for labor among cotton-producing firms in Texas will _________ -The demand for labor among textile-producing firms in South Carolina, for which cotton is an input, will ______ -The temporary unemployment resulting from such sectoral shifts in the economy is best described as _______ unemployment

Decrease, increase, frictional Frictional unemployment often results from changes in the demand for labor among firms. When the world price of cotton falls, cotton-producing firms will find it less profitable to produce cotton. As cotton-producing firms decrease production, the demand for labor with which to produce cotton decreases. Job opportunities in Texas contract. For textile-producing firms, the decrease in the world price of cotton decreases production costs. As textile-producing firms increase production, the demand for labor in South Carolina increases. Job opportunities in South Carolina expand. Workers laid off in one sector will take time to find new positions in an expanding sector. These types of sectoral shifts occur continuously in a dynamic economy, so there will always be some level of frictional unemployment.

Your bank account pays an interest rate of 9 percent. You are considering buying a share of stock in XYZ Corporation for $90. Suppose you know that after year 1 and after year 2 the corporation will pay a dividend of $8. Suppose you expect to sell the stock after 2 years for $100. Is the stock a good investment given your alternative? What is the most you should pay for a share of this corporation?

Given the information, the present value of a share of XYZ Corporation can be calculated using the present value formula for a coupon bond. Since the stock has a present value of $98.24 and the present cost is the price which is $90 then this is a good investment.

Consider two zero coupon bonds: Bond A pays $8,000 in 10 years so it has a term of 10 years. Bond B pays $8,000 in 20 years so its term is 20 years. Suppose the interest rate is 7 percent. Instead of using the present value formula for zeros, use the rule of 70 to calculate the approximate value of Bond A and the value of Bond B today. Now suppose the interest rate increases to 14 percent. Again, using the rule of 70, calculate the approximate value of Bond A and the value of Bond B today. Comparing each bond's value at 7 percent versus each bond's value 14 percent, which bond sees its value decrease by a greater percentage? Write down a general rule that describes for the relationship between the percentage change in the value of a bond, changes in the interest rate, and a bond's term.

Remember the rule of 70 is the time to double. That is, 70/(annual growth rate) = the number of years to double. At a 7% interest rate the rule of 70 implies doubling takes 10 years. For Bond A which has term 3 of 10 years its value will double in 10 years. Since it pays $8000 in 10 years it must be worth half that today or $4000. Bond B has term of 20 years so at 7% interest its value doubles every 10 years which is two doublings in 20 years. Two doublings is a factor of four. Since it pays $8000 in 20 years it must be worth one fourth that today or $2000. At a 14% interest rate the rule of 70 implies doubling takes 5 years. For Bond A, which has term of 10 years, its value will now double twice in 10 years; two doublings is a factor of four. Since it pays $8000 in 10 years it must be worth one fourth that today or $2000. Bond B has term of 20 years so at 14% interest its value doubles every 5 years, which is four doublings in 20 years. Four doublings is 24 is a factor of 16. Since it pays $8000 in 20 years it must be worth one sixteenth of that today or $500. For Bond A the 10 year bond, when the interest rate doubles from 7% to 14% the present value of the bond goes from $4000 to $2000 which is a reduction of 50%. For Bond B the 20 year bond, when the interest rate doubles from 7% to 14% the present value of the bond goes from $2000 to $500 which is a reduction of 75%. For a given increase in interest rates, bonds with longer terms experience a larger percentage fall in value when compared to shorter term bonds, other things equal.

Suppose the public expects a certain corporation to lose money this quarter with the loss equal to a loss of $5 a share. When the company announces its quarterly earnings it reports a loss equal to only $4 a share, which is still the largest loss in the history of the company. What does the efficient market hypothesis say will happen to the price of the stock when the $4 loss is announced?

The stock price will rise. Even though the company suffered a loss, the price of the stock initially reflected an even larger expected loss. When the actual loss turns out to be less than expected the efficient markets hypothesis indicates that the stock price will rise on the better than expected news.

A company has an investment project that would cost $20 million today, and not yield any payoffs until 5 years from now when it will be worth $28 million. For each of the following alternative interest rates determine whether the firm should undertake the project: 7%, 6%. Write down the formula you would need to figure out the exact cutoff for the interest rate between profitability and non-profitability?

Use the present value formula for a zero coupon bond since this project makes only one payment at the maturity date 5 years from now. That is, we use 𝑃𝑉 = $28,000,000 1+𝑖 ! When the interest rate is 7% the present value is $19,963,613.02, so the firm should not invest. When the interest rate is 6% the present value is $20,923,228.84, so the firm should invest. Notice as the interest rate falls the present value of the project increases. The formula you would need to figure out the exact cutoff for the interest rate between profitability and non-profitability is $20 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 = $28 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 1+𝑖 !

According to legend, Native Americans sold the island of Manhattan about 400 years ago for $24. If they had invested this amount at an interest rate of 4 percent per year, approximately how much would they have had today?

$24*(1.04)400 = $156,151,787.92 which is about $156 million.

The three people described in the following table are categorized as unemployed by the Bureau of Labor Statistics. Identify each person in the table as structurally, frictionally, or cyclically unemployed. 1. A recent recession has reduced the number of visitors to a local theme park. The park has had to lay off many of its employees, including Caroline. 2. Shen recently lost his job as a dishwasher. Minimum-wage legislation keeps employers from adding more of the low-skill positions for which he qualifies, so he has been unable to find work. 3. Valerie just graduated from college and is looking for a full-time position with an investment banking firm.

1. Cyclical unemployment 2. Structural unemployment 3. Frictional unemployment Structural unemployment arises from a mismatch between the jobs available in some labor markets and the skills of workers. One cause of structural unemployment is institutional factors such as a minimum wage, which holds wages above the marginal productivity of less skilled workers, limiting their employment opportunities. Frictional unemployment occurs because job seekers and employers need time to find one another. Therefore, Valerie is considered to be frictionally unemployed. This kind of unemployment is usually brief. Cyclical unemployment is the form of unemployment associated with business cycles. This kind of unemployment rises during recessions and falls during expansions. Because Caroline lost her job due to the recession, she would generally be considered to be cyclically unemployed.

Consider a small economy composed of six people: Dmitri, Frances, Jake, Latasha, Rosa, and Nick. Each person's employment status is described in the following table. -Dmitri is a 22-year-old professional tennis player. When he's not competing, he works as a coach at a local tennis club. -Frances is a 30-year-old professional basketball player. She finished her last season as a player 3 weeks ago and is currently interviewing for a coaching position. -Jake is a 44-year-old accountant who has been out of work for almost a year. He became so discouraged that he gave up on his job search a couple of months ago. -Rosa is a 29-year-old who lost her job as an associate producer for a radio station. After spending a few weeks out of work and interviewing for several other positions, she gave up on her job search and decided to go back to grad school. She made that decision a few months ago. -Nick is a famous novelist. He is spending the summer at his lake house in upstate New York, doing a little writing each day but mostly spending his time gardening and reading. -Latasha is a 13-year-old student at West Valley Middle School. She babysits her younger sister and does other chores, so her parents give her an allowance of $30 per week.

1. Employed 2. Unemployed 3. Not in labor force (discouraged worker) 4. Not in labor force 5. Employed 6. Not in adult population