Page 15 of 20 E1/1102-Spring 2018-Final - Page 14 of 19 Name: (d) (4pts) Silk is one of England's main imports. In fact, foreign silk is so cheap there is no domestic production and all silk is imported. In order to improve the current account balance, the government decides to increase tariffs on foreign silk. The tariff is so high that now all silk bought in England must be produced domestically. Illustrate both these scenarios on the graph provided to you below. Show the consumer and producer surplus after the tariff is implemented. Show the decrease in total surplus relative to the situation before the tariff. Price Domestic supply Domestic demand QuantityPage 13 of 20 (10pts) 2. International trade and finance In 2017, England with a currency of pounds sterling exported goods worth 250 million pounds sterling and imported goods worth 300 million pounds sterling. Moreover, England's merchants earned 10 million pounds sterling of profits on their investment abroad. At the same time, the government had to pay 10% interest on its debt of 200 million pounds sterling to foreign bankers. You can assume that all the transactions described above take place in 2017 and that any debt payments only go toward paying the interest on the debt and not paying down the stock of debt. (a) (3 pts) What was England's trade balance? What was the current account balance? (b) (2 pts) Suppose the government sells its debt in form of bonds. These bonds mature in 3 years. Face value of the bond is 1000 pounds sterling. There are also two coupon payments equal to 5% of face value, paid first after one year and second at maturity. Write down the equation for the equilibrium price of these bonds. IMI PrtScPage K 14 of 20 E1/1102-Spring 2018-Final -Page 13 of 19 - Name: (c) (1 pt) The king of England has suddenly died. The new king ascends the throne. He has been known for burning his creditors with his dragon a few years back. What do you expect to happen with the interest demanded by foreign merchants on government bonds? What do you expect to happen with the price of the bonds