inancial Markets and Other Markets 2 There is an economy with a central bank, a Bank A and a firm B. The Bank's T-Account is given by a (10 points) If the central bank sets the required reserve ratio for commercial banks 10%, how many of this bank's reserves are required and how many are excess reserves? For parts b and c, assume the following: Firm B has a plan to invest in a new project that costs $30B. To finance this, it issued one-year bonds with $100 face values. Bank A purchased all of them. b (10 points) Suppose that bonds sold by Firm B are one-year zero-coupon bonds and has a face value of $100 and that the market interest rate is 3% annually. How many bonds does Firm B need to sell to finance a $30B expansion? Assume that bonds are priced at the market interest rate. c (20 points) Suppose that Bank A purchases $30 B in bonds from firm B. Show Bank A's new T-Account. For parts d through f, consider the following scenario: Suppose that the required reserve ratio was set at 10% and shortly after the economy enters a downturn. Depositors worry that they will be unable to withdraw their money. All the bank's depositors show up and demand the bank return their deposits. If the bank is unable to cover all their deposits with its cash on hand, it can sell its Mortgage-Backed Securities (MBS) at 85\% value and its Corporate Bonds at 90% value. d (20 points) Suppose that Bank A had not made a loan in part (c). Show their value under the situation described above and argue whether or not they would be able to repay their depositors. e (30 points) Now assume that Bank A has executed its loan in part (c). Is the bank still solvent? Can the bank repay its depositors? f (10 point) How would this affect the aggregate economy