a) Draw a demand-supply diagram of an asset, which is initially perceived as risky. Suppose
the asset in question is now perceived as risk-free. How will your demand-supply diagram
change? Show the change in the same diagram. Briefly explain.
b) What happens when the asset in “part a”, is suddenly revealed to be risky?
c) Suppose the banking sector raises money by selling such financial assets to investors. For
the banking sector as well as for investors in general, discuss the macro-economic
implications of incorrectly perceiving risky financial assets as risk-free. What happens when
the truth about such assets is suddenly revealed?
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