Homework Assignment #1
Directions: Please answer each of the following questions in as detailed a manner as possible, and be sure to include all appropriate material discussed in the lectures and the assigned reading material.
1) Define what we mean by money and how it is used in the day to day functioning of the U.S. economy. Be sure to include the major components that make up what is defined as money and which of these components is used most widely to identify what money is. Also, include the major functions that money serves as a part of the overall economy and how banks act to create and maintain money.
2) Name and discuss the four major theories that address the term structure of interest rates. In your discussion, indicate the strengths and weaknesses of each of the theories and which theory or theories appear to be the most well accepted as explanations of term structure.
3) Explain the role that money plays under the Classical Macroeconomic Model. As a part of your discussion, include the impact the Quantity Theory of Money and Say’s Law have on this model and state in algebraic terms how the money supply relates to prices.
4) Compare and contrast pure discount bonds with coupon bonds and provide at least one example of such government or corporate bonds that can be bought and sold by investors. Describe the way interest rates are determined for these bonds by using the appropriate formula or formulas and explain the overall relationship between bond prices and interest rates.
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