Any debt security can be estimated by first determining the risk-free yield that is currently offered by treasury security with a similar maturity. Then adjustments are made that account for credit risk, liquidity, tax status, and other provisions.

1. Assuming that liquidity and interest rate expectation are both important for explaining the shape of a yield curve, what does a flat yield curve indicate about the market perception of future interest rate?
2. Assume that (1) investors and borrowers expect that the economy will weaken, and that inflation will decline. (2) investors require a small liquidity premium, and (3) markets are particularly segmented, and the treasury currently prefers borrowing in short term markets. Explain how each of these forces would affect the term structure, holding other factors constant. Then explain the effect on term structure overall.
3. A clint deposited the amount of $1,000,000 in his/her bank. If the clint decided to hold 25% in cash and the reserve ratio requirement is 15% what will be the amount of money created in the economy because of this deposit?