Q1. A lottery claims its grand prize is $15 million, payable over five years at $3,000,000

per year. If the first payment is made immediately, what is this grand prize really

worth? Use an interest rate of 7%. [10 marks]

A) "Inflation has a powerful bearing on interest rates". Explain the rationale and

implication of this statement. [10 marks]

B) With the aid of a diagram, explain the economic intuition behind the Phillips

curve. [10 marks]

C) Explain the policy implications of the Philips Curve. [5 marks]

D) Explain why interest rates on short-term bonds will usually be lower than interest

rates on longer-maturity bonds. [5 marks]