1. With short-term interest rates near 0 percent in 2010, suppose the Treasury decided to replace maturing notes and bonds by issuing new Treasury bills, thus shortening the average maturity of U.S. debt outstanding. Discuss the pros and cons of this strategy.

2. The average maturity of outstanding U.S. Treasury debt is about 5 years. Suppose a newly issued 5-year Treasury note has a coupon rate of 2 percent and sells for par. What happens to the value of this debt if the inflation rate rises 1 percentage point, causing the yield-to-maturity on the 5-year note to jump to 3 percent shortly after it is issued?

3. Assume that the