3. You are the manager of the Bank of Tatooine, a commercial bank on the planet Tatooine. You use $10 million in reserves to issue a line of credit to Jabba the Hutt, a local businessman who is importing goods from the planet Kessel. The line of credit is just a loan you provided Jabba to purchase the goods. Once the goods were imported and sold, Jabba would repay the line of credit with interest. Unfortunately, Han Solo, the pilot Jabba hired to fly the goods from Kessel to Tatooine, ditched the cargo. Thus, Jabba does not have any goods to sell and is in risk on defaulting on his line of credit. This would put you in a tough spot because of the line of credit is not repaid, your bank is at risk of insolvency. Fortunately for you, Jabba the Hutt has hired the famous Bounty Hunter Bobo Fett to track down Han Solo to recoup the value of the lost cargo. This is along the lines of repossessing a car or foreclosing on a house if a borrower defaults on a car loan or mortgage. After talking to your regulator at the Galactic Federal Reserve, the regulator is convinced that Jabba will be successful in capturing Han Solo and repaying your loan. Thus, the regulator is not forcing you to reduce the value of the loan on your balance sheet, keeping your bank solvent. However, you need to borrow $10 million in reserves to meet the Galactic reserve requirement. a. If Jabba does not repay the line of credit, why is the Bank of Tatooine at risk of insolvency? b. You call the First National Bank of Corcusant, the largest bank in the Galaxy. The bank is willing to loan you $10 million in reserves in the federal funds market at a 2% federal funds rate. The discount rate is currently 1.5%. Who do you borrow the reserves from, the First National Bank of Corcusant or the Galactic Federal Reserve? Why? c. Before you can borrow the reserves, the Galactic Federal Reserve increases the discount rate to 2.5%. Who do you borrow the reserves from now? d. Compare your answers to a and b. Does raising the discount rate expand or restrict the money supply? Why? 3. You are the manager of the Bank of Tatooine, a commercial bank on the planet Tatooine. You use $10 million in reserves to issue a line of credit to Jabba the Hutt, a local businessman who is importing goods from the planet Kessel. The line of credit is just a loan you provided Jabba to purchase the goods. Once the goods were imported and sold, Jabba would repay the line of credit with interest. Unfortunately, Han Solo, the pilot Jabba hired to fly the goods from Kessel to Tatooine, ditched the cargo. Thus, Jabba does not have any goods to sell and is in risk on defaulting on his line of credit. This would put you in a tough spot because of the line of credit is not repaid, your bank is at risk of insolvency. Fortunately for you, Jabba the Hutt has hired the famous Bounty Hunter Bobo Fett to track down Han Solo to recoup the value of the lost cargo. This is along the lines of repossessing a car or foreclosing on a house if a borrower defaults on a car loan or mortgage. After talking to your regulator at the Galactic Federal Reserve, the regulator is convinced that Jabba will be successful in capturing Han Solo and repaying your loan. Thus, the regulator is not forcing you to reduce the value of the loan on your balance sheet, keeping your bank solvent. However, you need to borrow $10 million in reserves to meet the Galactic reserve requirement. a. If Jabba does not repay the line of credit, why is the Bank of Tatooine at risk of insolvency? b. You call the First National Bank of Corcusant, the largest bank in the Galaxy. The bank is willing to loan you $10 million in reserves in the federal funds market at a 2% federal funds rate. The discount rate is currently 1.5%. Who do you borrow the reserves from, the First National Bank of Corcusant or the Galactic Federal Reserve? Why? c. Before you can borrow the reserves, the Galactic Federal Reserve increases the discount rate to 2.5%. Who do you borrow the reserves from now? d. Compare your answers to a and b. Does raising the discount rate expand or restrict the money supply? Why