Suppose that creditors and debtors trade according to the economy described in Chapter 12. Specifically, all old creditors arrive in the morning on the central island, but some have to leave at noon. There is a fraction of old debtors arriving in the morning; the remainder arrive after noon. The aggregate value of IOUs held by old creditors is $100 million. We know that the group of old creditors that arrive in the morning but must depart at noon hold $30 million in IOUs. Assume there are debtors that arrive in the morning with $15 million in cash.

a. Can you tell me anything about the value of the aggregate money supply that is circulating in this economy?

b. If those old creditors that have to leave at noon could sell their IOUs, what is the equilibrium price in the secondary market?

c. In or two sentences, explain why the old creditor leaving at noon would be willing to sell their IOUs at this price?

d. Compute the value of goods of goods consumed by those old creditors that stay on the central island after noon.

e. How could a central bank make those before-noon-leaving creditors better off?