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ECN 481, Assignment #1

Note that you do not need to look up any additional historical information – all the information that you need is contained in the questions themselves.

1. Suppose that households move funds from demand deposits to small time deposits.  How does M1 change as a result?  How does M2 change as a result? (2 points)

2. Name a reason why retail Money Market Mutual Funds are not included in M1 but demand deposits and other checkable deposits are.  What specific role of money does this analysis (e.g. medium of exchange, standard of value, standard of deferred payments, store of value) pertain to? (2 points)

3. Small time deposits and NOW accounts (part of checkable deposits) are both interest-bearing bank deposits.  But NOW accounts have checkable privileges and can be withdrawn any time, while small time deposits have no checkable privileges and can’t be withdrawn before maturity without penalty.  Then why would anyone have small time deposit?  Provide the fundamental economic concept behind this argument (2 points).

4. Given the following three sets of bonds:

90 day Commercial Paper (AAA rated)

90 day Commercial Paper (BAA rated)

90 day Treasury Bills

Rank their interest rates from lowest to highest.  Defend your ranking. (2 points)

5. Define the Federal Funds rate.  Briefly explain how this interest rate is especially important to the Federal Reserve (2 points).

6. Choose an interest rate that we’ve covered in class other than the 3 month Treasury Bill rate or the Federal Funds rate.  Provide an explicit definition for this interest rate.  Now consider the website of the Federal Reserve Economic Database (FRED), given by http://fred.stlouisfed.org/.  Using this database, look up a series for this interest rate and provide a hard copy of the FRED graph of this series.  Based upon the graph, provide a brief evaluation of how this variable has changed over time   (3 points).