1. Why does it seem to be important to regulate and control the supply of money?

2. Assume a financial system has a monetary base of $25 million. The required reserves ratio is 10 percent and there are no leakages in the system.

a) What is the size of the money multiplier?

b) What will be the system's money supply?

3. What are the factors, in addition to supply and demand relationships, that determines market interest rates?

4 Assume you are employed as an investment advisor. You are working with a retired individual who depends on her income from her investments to meet her day-to-day expenditures. She would like to find a way of increasing the current income from her investments. A new junk bond issue has come to your attention. If you sell these high-yield bonds to a client, you will earn a higher than average fee. You wonder whether this would be a win-win investment for your retired client, who is seeking higher current income, and for you, who would benefit in terms of increased fees. What would you do?

4. (a) Assume investors expect a 2.0 percent real rate of return over the next year. If inflation is expected to be 0.5 percent, what is the expected nominal interest rate for a one-year U.S. Treasury security?

(b) A one-year U.S. Treasury security has a nominal interest rate of 2.25 percent. If the expected real rate of interest is 1.5 percent, what is the expected annual inflation rate?

5. Why might an investor find a zero-coupon bond an attractive investment?

6. The Garcia Company's bonds have a face value of $1,000, will mature in 10 years, and carry a coupon rate of 16 percent. Assume interest payments are made semiannually.