Whitman CollegeEcon 407Exam 1October 2, 1995 Read the entire exam before you write any answers. Write all answers in your bluebook.Show all of your work.1. (25pts) Consider the following statement. "The reason why societies started using money is because their governments insisted they do so." Would Adam Smith and Karl Menger agree with this statement? Explain, referring to Smith's and Menger's accounts ofthe origin of money to support your argument.2. Consider the economic costs of inflation uncertainty. One of these costs is lost economic investment due to lenders requiring higher real interest rates when inflation uncertainty increases.(a) (15pts) Did the evidence from the class loan market experiment support the conclusion that higher real interest rates and less economic investment result from increased inflation uncertainty? Explain your answer.(b) (10pts) List and briefly explain other economic costs caused by inflation uncertainty.3. Use the yield curves below to answer the following.(a) (8pts) What was the price of a one year Treasury bill with a face value of $10,000 issued on October 5, 1993?(b) (8pts) What was the price of a one year Treasury bill with a face value of $10,000 issued on September 28, 1995?(c) (5pts) What is the relationship between price and yield to maturity for a bond with a given term to maturity and face value?4. (a) (25pts) Suppose that the assumptions of the Pure Expectations Theory of the termstructure of interest rates hold. Consider the yield curve from October 1993 given in Question 3. Use this yield curve to forecast the annual yield to maturity of a three-year Treasury bill offered for sale at the end of September 1995. Explain all of your reasoning,with reference to the assumptions of the Pure Expectations Theory.(b) (4pts) How accurate was the forecast in part (a)? Use the yield curve from September 1995 to answer this