Rainy State Government had good revenues and generated enough surplus to invest in $180,000 shares issued by North Bank, an Australian commercial bank (transaction 1). Hobby Club, which had exceptionally high expenses well above their revenues, takes a loan of $70,000 from North Bank (transaction 2).

Hobby Club has a deposit account at North Bank. Rainy State Governmenthas a deposit account at South Bank, another Australian commercial bank.

a) Draw two balance sheets, one for Hobby Club and one for North Bank. Represent the respective changes in Hobby Club's balance sheet and in North Bank's balance sheet resulting from transactions 1 and 2. [Clearly indicate the name of the item affected in the balance sheet, the change in $ value and between brackets the number of the transaction.] No explanation is required.

b) Draw one diagram of flow of funds that includes transactions 1 and 2. [Clearly indicate the financial instruments, the financial markets, the banks, the type of money involved, creation and destruction where relevant, and the status of the different parties - SSU, DSU and financial intermediary]. Do NOT include the central bank. Each party should appear only once. No explanation is required.

c) Which components of the story constitute channelling of funds in the financial system and for which $ value? Do funds transit through a financial intermediary? Explain your answers in detail.

d) Does the story involve net change of private money in the payment system and, if so, in which direction and which $ value? Explain your answers in detail.

Answer rating: 100% (QA)

a Balance Sheets Hobby Club Transaction 1 Transaction 2 Assets 180000 70000 Liabilities 70000 North ... View the full answer