3.1. An economist has estimated that, near the point of equilibrium, the demand curve and supply curveforone-year discount bonds with face value of $1,000 can be estimated using the following equations:

B demand: P = -2/5 Q + 940 B supply: P = Q +500

What is the expected equilibrium price and quantity of bonds in this market?

Given your answer to part (a), which is the expected interest rate in this market?

3.2.Demand and Supply curves for bonds are to be the same as in 3.1.

Following a dramatic increase in the value of the stock market, many retirees started moving money out of the stock market and into bonds. This resulted in a parallel shift in the demand for bonds, such that the price of bonds at all quantities increased $50.

Assuming no change in the supply equation for bonds, what is the new equilibrium price and quantity?

What is the new market interest rate?

3.3. Demand and Supply equations for bonds are estimated as in problem 3.1.

As the stock market continued to rise, the Federal Reserve felt the need to increase the interest rates. As a result, the new market interest rate increased to 19.65%, but the equilibrium quantity remained unchanged.

What are the new demand and supply equations? Assume parallel shifts in the curves.

Hint: you need to find the new equilibrium P* and Q*, and then plug them in the equations for Demand and Supply to find the new Demand and Supply.

3.4.Graphically represent the situations in questions 1, 2, 3 above. Make sure to label all curves, shifts of the curves, and all equilibrium points. The graph could be not to scale, but all necessary labels must be present.

Solve this problem by handorin Excel.