Name:_________________________ ECO 340 800 Money & Banking 1.

Homework #1, due Monday, 2/11

(4 pts.) Explain how money encourages specialization, and how specialization improves everyones standard of living.

2.

(4 pts.) In Figure 2.3 in your text we see the growth rates of M1 and M2 moving in opposite directions after 1980. Explain how this is possible, given the component of each aggregate.

3.

(6 pts.) Most young people (and the people in this class) face a great deal of uncertainty about their future income. Consider a financial instrument that would allow you to control that risk: The college student would sell the rights to 10% of his/her future annual income after college to a buyer. In return, the buyer promises the student a fixed payment of $8,000 per year after college. (a) What types of college students would find this security attractive? Explain.

2 (b) What are some of the risks associated with this security for the college student (the seller of the security)? What about the buyers of this security?

4.

(6 pts.) For each pair of instruments below, use the criteria for valuing financial instruments to choose the one with the highest value. Briefly explain your answer. a) A U.S. Treasury bill that pays $1,000 in six months OR a U.S. Treasury bill the pays $1,000 in three months.

b)

A U.S. Treasury bill that pays $1,000 in three months OR commercial paper issued by a private corporation that pays $1,000 in three months.

c)

An insurance policy that pays out in the event of a serious illness or one that pays out when healthy.