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business
principles of macroeconomics
Questions and Answers of
Principles Of Macroeconomics
=+ 8. Consider an economy with two labor markets—
=+e. An expert welder with little formal education who loses her job when the company installs automatic welding machinery
=+d. A short-order cook who loses his job when a new restaurant opens across the street
=+c. A stagecoach-industry worker laid off because of competition from railroads
=+b. A manufacturing worker who loses her job at a plant in an isolated area
=+a. A construction worker laid off because of bad weather
=+6. Are the following workers more likely to experience short-term or long-term unemployment?Explain.
=+f. Advances in health care prolong the life of many retirees.
=+e. A stock market boom induces newly enriched 60-year-old workers to take early retirement.
=+d. Numerous students graduate from college and immediately begin new jobs.
=+c. Numerous students graduate from college but cannot find work.
=+b. After an unsuccessful search, some of the laid-off workers quit looking for new jobs.
=+a. An auto company goes bankrupt and lays off its workers, who immediately start looking for new jobs.
=+Explain what happens to each of these in the following scenarios. In your opinion, which statistic is the more meaningful gauge of how well the economy is doing?
=+how well an economy is using its most valuable resource—its people. Two closely watched statistics are the unemployment rate and the employment-population ratio.
=+ 5. Economists use labor-market data to evaluate
=+ Why might one expect a reduction in the number of people counted as unemployed to be smaller than the increase in the number of people employed?
=+ How are these numbers consistent with each other?
=+ 4. Between 2004 and 2007, total U.S. employment increased by 6.8 million workers, but the number of unemployed workers declined by only 1.1 million.
=+do you think explains the increase in labor-force participation for women?
=+ Given this information, what factor do you think played the key role in the decline in male labor-force participation over this period? What
=+All Women 16–24 25–54 55 and older 1970 43% 51% 50% 25%2000 60 63 77 26
=+for different age groups, however, as shown in the following tables.Men Men Men All Men 16–24 25–54 55 and older 1970 80% 69% 96% 56%2000 75 69 92 40
=+ 3. As shown in Figure 3, the overall labor-force participation rate of men declined between 1970 and 2000. At the same time, the labor-force participation rate of women increased sharply.This
=+on age, sex, and race). Is it higher or lower than the national average? Why do you think this is so?
=+ 2. Go to the website of the Bureau of Labor Statistics (http://www.bls.gov). What is the national unemployment rate right now? Find the unemployment rate for the demographic group that best fits
=+unemployed, and 79,436,000 were not in the labor force. Use this information to calculate:a. the adult populationb. the labor forcec. the labor-force participation rated. the unemployment rate
=+1. The Bureau of Labor Statistics announced that in February 2008, of all adult Americans, 145,993,000 were employed, 7,381,000 were
=+ 5. How do unions affect the natural rate of unemployment?
=+How might the government reduce the amount of frictional unemployment?
=+ 3. Why is frictional unemployment inevitable?
=+ 2. Is unemployment typically short-term or longterm? Explain.
=+How does the BLS compute the labor force, the unemployment rate, and the labor-force participation rate?
=+1. What are the three categories into which the Bureau of Labor Statistics divides everyone?
=+How does it affect wages and employment in other industries
=+How does a union in the auto industry affect wages and employment at General Motors and Ford?
=+ Show the quantity of labor supplied, the quantity demanded, and the amount of unemployment.
=+Draw the supply curve and the demand curve for a labor market in which the wage is fixed above the equilibrium level.
=+What public policies might affect the amount of unemployment caused by this price change?
=+ Is this unemployment undesirable?
=+How would an increase in the world price of oil affect the amount of frictional unemployment?
=+How might it understate the amount of joblessness?
=+ • How might the unemployment rate overstate the amount of joblessness?
=+How is the unemployment rate measured?
=+place to look for data on mutual funds is http://www.morningstar.com.) What do you learn from this comparison?
=+performed compared with other stock mutual funds over the past 5 or 10 years? (Hint: One
=+11. Find some information on an index fund (such as the Vanguard Total Stock Market Index, ticker symbol VTSMX). How has this fund
=+c. Insider trading is illegal. Why do you suppose that is?
=+Does this fact violate the efficient markets hypothesis?
=+b. Those who trade stocks based on inside information usually earn very high rates of return.
=+a. Give an example of inside information that might be useful for buying or selling stock.
=+10. When company executives buy and sell stock based on private information they obtain as part of their jobs, they are engaged in insider trading.
=+companies compare to those of other companies? What might be the disadvantage of buying stock in these companies?
=+b. Another roommate says he only buys stock in companies that are cheap, which he measures by a low price-earnings ratio. How do you suppose the earnings prospects of these
=+to the price-earnings ratio of other companies? What might be the disadvantage of buying stock in these companies?
=+the future. How do you suppose the price-earnings ratio of these companies compares
=+a. One roommate says that he buys stock only in companies that everyone believes will experience big increases in profits in
=+ 9. You have two roommates who invest in the stock market.
=+market risk is that the economy might enter a recession, reducing sales. Which of these two risks would more likely cause the company’s shareholders to demand a higher return? Why?
=+ 8. A company faces two kinds of risk. A firmspecific risk is that a competitor might enter its market and take some of its customers. A
=+that is very sensitive to economic conditions(such as an automaker) or stock in an industry that is relatively insensitive to economic conditions (such as a water company)? Why?
=+ 7. Which kind of stock would you expect to pay the higher average return: stock in an industry
=+stocks be of companies in the same industry?Should the stocks be of companies located in the same country? Explain.
=+ 6. Imagine that you intend to buy a portfolio of ten stocks with some of your savings. Should the
=+ How would you compare this idea with the current tax treatment of health insurance?
=+d. In your view, is this congressional action a good idea?
=+c. Suppose that the average person now spends$2,000 a year on clothes. Would clothing insurance cost more or less than $2,000?Explain.
=+b. Who would choose to buy clothing insurance?
=+ How would you evaluate this change in behavior from the standpoint of economic efficiency?
=+a. How would the existence of such insurance affect the amount of clothing that people buy?
=+pay for 80 percent of your clothing expenses(you pay the remaining 20 percent), and the tax laws would partly subsidize your insurance premiums.
=+preferential tax treatment to “clothing insurance.” Under this new type of insurance, you would pay the insurance company an annual premium, the insurance company would then
=+ 5. Imagine that the U.S. Congress, recognizing the importance of being well dressed, started giving
=+ 4. For each of the following kinds of insurance, give an example of behavior that can be called moral hazard and another example of behavior that can be called adverse selection.a. health
=+expect to sell the stock after 3 years for $120. Is XYZ a good investment? Support your answer with calculations.
=+stock in XYZ Corporation for $110. After 1, 2, and 3 years, it will pay a dividend of $5. You
=+ 3. Your bank account pays an interest rate of 8 percent. You are considering buying a share of
=+b. Can you figure out the exact cutoff for the interest rate between profitability and nonprofitability?
=+a. Should the firm undertake the project if the interest rate is 11 percent? 10 percent? 9 percent? 8 percent?
=+2. A company has an investment project that would cost $10 million today and yield a payoff of $15 million in 4 years.
=+1. According to an old myth, Native Americans sold the island of Manhattan about 400 years ago for $24. If they had invested this amount at an interest rate of 7 percent per year, how much would
=+ 7. Explain the view of those economists who are skeptical of the efficient markets hypothesis.
=+ 6. Describe the efficient markets hypothesis and give a piece of evidence consistent with this hypothesis.
=+ 5. What factors should a stock analyst think about in determining the value of a share of stock?
=+Which pays a higher average return?
=+4. Comparing stocks and government bonds, which has more risk?
=+Does a stockholder get more diversification going from 1 to 10 stocks or going from 100 to 120 stocks?
=+ 3. What is diversification?
=+What two problems impede the insurance company from working perfectly?
=+ 2. What benefit do people get from the market for insurance?
=+1. The interest rate is 7 percent. Use the concept of present value to compare $200 to be received in 10 years and $300 to be received in 20 years.
=+ will you earn a better than average return? Explain.
=+if you restrict your stock portfolio to these companies,
=+According to the efficient markets hypothesis,
=+Fortune magazine regularly publishes a list of the “most respected” companies.
=+Describe three ways that a risk-averse person might reduce the risk she faces.
=+The interest rate is 7 percent. What is the present value of $150 to be received in 10 years?
=+b. What would you need to know about private saving to judge which of these two policies would be a more effective way to raise investment?
=+a. Why is it difficult to implement both of these policies at the same time?
=+saving and by reducing the government budget deficit.
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