1. Sovereign debt renegotiation {30 points} Consider an economy with an external debt of D = so . Assume the economy's capacityr to honor its debt is stale-dependent. Specically. suppose there are two states: good and bad. In the good state the economy can pay its debt in full. to the bad state it can pay at most EU. The probability of the bed state is given by JTHJ] = min {LUIIID} a. Calculate the value ofthe economy's external debt on the secondary market. b. Would it be in creditors' collective best interest to forgive [0' units of debt'? c. Calculate the maximum amount of debt forgiveness that would be in creditors' collective best interest. d. Calculate the amount of debt forgiveness that maximizes creditors' collective welfare. e. Suppose now that D = so and the IMF agrees to bu}:r It} units of the country's debt, which it will unilaterally forgive. i. What price (per unit} will the IMF have to pay to bu}.r this debt on the secondary.r market? it. What is the total cost ofthe operation? iii. By how much does creditors' expected income increase\"? iv. By how much does the debtor nation's expected payments decline