Consider an economy with one bank and one firm (called Firm A) which employs all individuals in the economy This bank has the following T Account Assets Reserves $60B Mortgage Backed Securities $500B Corporate Bonds (Firm A) $200B Liabilities Deposits $600B Repos $100B Bank Capital $60B Firm A finances its operations using 1 year corporate debt They produce according to the following schedule Interest Rate on Bonds 0 05 0 045 0 04 0 035 0 03 0 025 0 02 0 015 0 01 Quantity Produced 110B 120B 150B 200B 250B 400B Labor Employed 11M 13M 20M 30M 45M 75M The good that they produce is always sold for $2 each a (3 points) The bonds sold by Firm A are zero coupon bonds and a face value of $1000 If the price of the bond is $975 61, what is the interest rate on this bond using the table above (round to nearest interest rate on the table) At this interest rate, how much quantity does the firm produce How much labor do they employ b (2 points) The market for Firm As corporate debt currently has the following supply and demand curves (note that quantities are in millions of units) PD 982 0 02495 QD (1) PS 963 0 0492QS (2) Show that the equilibrium price in this market is P 975 61 by setting P S P D and Q 256 25M by setting QS QD (note that quantities are in millions) c (1 points) Evil mastermind Auric Goldfinger executes a plan to rob the bank and steals $15B worth of Corporate Bonds and $240B worth of mortgage backed securities How many bonds does the bank still have Is the bank still solvent d (4 points) The bank must liquidate its portfolio in order to repay its depositors and lenders With the quantity of bonds you found in the previous part, what is the new equilibrium price and quantity in the market for bonds (note that equilibrium quantity will increase by the amount the bank must sell) What is the new interest rate What is the value of the banks corporate bonds at this price e (2 points) At the new interest rate (use 3 if you were unable to solve for the value in the previous part), how much does the firms output decrease How many workers lose their jobs at this new interest rate f (2 points) James Bond infiltrates Goldfingers secret compound, but is captured Goldfinger offers to return James Bond as well as the stolen bonds for $350B While Goldfinger is explaining his brilliant plan, Bond (the spy) escapes and is able to return all of the stolen bonds and mortgaged backed securities If James Bond hadnt been able to recovery the stolen assets, should the government have taken Goldfingers offer Why or why not

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Consider an economy with one bank and one firm (called Firm A) which employs all individuals in the economy. This bank has the following T-Account:

Assets Reserves: $60B Mortgage-Backed Securities: $500B Corporate Bonds (Firm A): $200B

Liabilities Deposits: $600B Repos: $100B Bank Capital: $60B

Firm A finances its operations using 1-year corporate debt. They produce according to the following schedule:

Interest Rate on Bonds 0.05 0.045 0.04 0.035 0.03 0.025 0.02 0.015 0.01

Quantity Produced 110B 120B 150B 200B 250B 400B

Labor Employed 11M 13M 20M 30M 45M 75M

The good that they produce is always sold for $2 each.

a (3 points) The bonds sold by Firm A are zero-coupon bonds and a face value of $1000. If the price of the bond is $975.61, what is the interest rate on this bond using the table above (round to nearest interest rate on the table)? At this interest rate, how much quantity does the firm produce? How much labor do they employ?
b (2 points) The market for Firm As corporate debt currently has the following supply and demand curves (note that quantities are in millions of units):

PD = 982 0.02495 QD (1) PS =963+0.0492QS (2)

Show that the equilibrium price in this market is P = 975.61 by setting P S = P D and Q = 256.25M by setting QS = QD (note that quantities are in millions).
c (1 points) Evil mastermind Auric Goldfinger executes a plan to rob the bank and steals $15B worth of Corporate Bonds and $240B worth of mortgage-backed securities. How many bonds does the bank still have? Is the bank still solvent?
d (4 points) The bank must liquidate its portfolio in order to repay its depositors and lenders. With the quantity of bonds you found in the previous part, what is the new equilibrium price and quantity in the market for bonds (note that equilibrium quantity will increase by the amount the bank must sell)? What is the new interest rate? What is the value of the banks corporate bonds at this price?
e (2 points) At the new interest rate (use 3% if you were unable to solve for the value in the previous part), how much does the firms output decrease? How many workers lose their jobs at this new interest rate?
f (2 points) James Bond infiltrates Goldfingers secret compound, but is captured. Goldfinger offers to return James Bond as well as the stolen bonds for $350B. While Goldfinger is explaining his brilliant plan, Bond (the spy) escapes and is able to return all of the stolen bonds and mortgaged-backed securities. If James Bond hadnt been able to recovery the stolen assets, should the government have taken Goldfingers offer? Why or why not?