1. The Federal Reserve has tried to define the money supply with M1 and M2, to match one of the fundamental concepts of money. In this regard, M1 is commonly referred to as a narrow measure of money, while M2 is a broad measure of money. Name and define one component (other than currency held by the public or travelers checks) which is in both M1 and M2. Then name and define one component (other than currency held by the public or travelers checks) which is in M1 but not in M2. Despite these efforts, the Fed is still unsure whether theyve defined money correctly and the money supply has in fact lost some of its usefulness in monetary policy. Briefly discuss the main issue of why the Federal Reserve is unsure that money is defined correctly. Please include the key fundamental role of money (e.g. medium of exchange, standard of value, standard of deferred payments, store of value choose one role) behind this issue. Briefly explain one way in which the Federal Reserve has sought to define money differently from the standard M1 and M2 measures because of this concern. (5 points). 2. Provide an example of two bonds whose interest rates are different. For each bond, briefly describe who issues the bond and for what reason. Describe why these interest rates are different identifying the key characteristic for your example, and state which bond has the higher interest rate as a result. Briefly discuss the role of inconvenience in this determination (5 points).

3. In 2009, interest rates exhibited a large decrease due to Federal Reserve policy and other factors. Therefore, what was happening to bond prices at the same time? Provide the definition of the yield to maturity (YTM) and explain why, based upon the interest rate as a YTM (feel free to use a specific YTM equation to help you in your explanation). Were investors in 2009 who had bought long-term bonds before this move happy or unhappy at the result? Explain why, using the rate of return measure (5 points).

4. Choose an interest rate other than the 3 month Treasury Bill rate or the Federal Funds rate. Provide an explicit definition for this interest rate. Now consider the website of the Federal Reserve Economic Database (FRED), given by http://fred.stlouisfed.org/. Using this database, look up a series for this interest rate and provide a hard copy of the FRED graph of this series. Based upon the graph, provide a brief evaluation of how this variable has changed over time (3 points).