1. There are three reasons why people demand money: for use in transactions, for precautionary reasons (meaning in case of emergencies) and for speculative safety (meaning in case some investments drop in value). Give an example of a time when you demanded money for each of these reasons. Describe the specific circumstances of your demand for money.
2. In a 2-page paper, address the following:

Recall that an exchange rate is the price of one currency in another. For example, it may take US $1.35 to buy 1 British Pound.Alsorecall the interest rates affect exchange rates. What do you predict will happen to the foreign exchange rate if interest rates in the United States increase more than in the UK? (In other words, which currency will become stronger?) How would such a change affect US exports to the UK? Would it be less expensive for an American tourist to take a vacation to London after the interest rate change? Be sure to clearly explain and justify your reasoning.

Ensure you have presented your assignment in a logical format, that has an introduction paragraph, the body (one or more paragraphs), and a concluding paragraph. Also, ensure that you have the appropriate formatting to avoid plagiarism and the appropriate grammar (this may be achieved by using free tools available on the Internet).

The following criteria will be used to grade the papers:

• Realistically and thoroughly explains what might happen to the foreign exchange rate.
• Makes realistic predictions about what might happen to US exports and explains why.
• Realistically predicts what might happen to the price of a London vacation and explains why.
• Organization and style of the essay.
• Organization Grading Guidelines: Presentation is very effective and presented in a logical format with a clear beginning, middle and end. There is a clear statement of ideas and smooth transitions. The writer has stated the main idea clearly and has provided relevant details. The main idea is clearly conveyed in a presentation that is highly relevant and interesting. The student provides evidence of thoughtful input. Details are rich and appropriate. Spelling,punctuation,and capitalization are virtually always correct.

3. A) Suppose the Fed were required to conduct monetary policy so as to hold the unemployment rate below 4%, the goal specified in the Humphrey-Hawkins Act. What implications would this have for the economy?

B) The statutes of the recently established European Central Bank (ECB) state that its primary objective is to maintain price stability. How does this charter differ from that of the Fed? What significance does it have for monetary policy?

C) Do you think the Fed should be given a clearer legislative mandate concerning macroeconomic goals? If so, what should it be?

D) In a speech in January 1995, Speech by Alan Greenspan before the Board of Directors of the National Association of Home Builders, January 28, 1995. Federal Reserve Chairman Alan Greenspan used a transportation metaphor to describe some of the difficulties of implementing monetary policy. He referred to the criticism levied against the Fed for shifting in 1994 to an anti-inflation, contractionary policy when the inflation rate was still quite low:

"To successfully navigate a bend in the river, the barge must begin the turn well before the bend is reached. Even so, currents are always changing and even an experienced crew cannot foresee all the events that might occur as the river is being navigated. A year ago, the Fed began its turn (a shift toward an expansionary monetary policy), and it was successful."

Mr. Greenspan was referring, of course, to the problem of lags. What kind of lag do you think he had in mind? What do you suppose the reference to changing currents means?