1. Suppose supply and demand for 1- year discount bonds with face value of 1320 AED are given by: Bs =-200 + 0.5 P, and Bs =-200 + 0.5 P & : Bd = 1000 0.5 P respectively where P is the price, B is the quantity.

a) Find the equilibrium quantity and price of bonds and the yield. Explain why P = 1000 AED cannot be an equilibrium price.

b) Now suppose expected inflation was zero. However there is a pandemic where the Central Bank expanded the money supply and expected inflation is 22%. Find the new equilibrium yield, price, and quantity of bonds. Find the new supply and the new demand curve for bonds algebraically. Sketch the old and new equilibrium in a graph.