Suppose that the tiny island called Paradise has only two commercial banks and one central bank. Long Beach Bank has $10 million in base money along with only two customers, Rachael and Ronny, who each have $2 million in their bank accounts. Blue Ocean Bank has $5 million in base money and only one customer, Paradise Real Estate, which has $2 million in its bank account.

a) Rachael finds a briefcase washed up on the beach that contains $5 million in cash. She deposits the money into her account with Long Beach Bank.

i. Show the impact on the balance sheet for Long Beach Bank (make sure to include the amount of equity on the balance sheet). (3 marks)

ii. Explain the impact on the amount of money in the system when Rachael deposits the $5 million into her bank account. (3 marks)

b) Rachael now wishes to buy a beach front block of land from Paradise Real Estate for $15 million. Long Beach Bank gives Rachael a loan for $10 million. Rachael then transfers $15 million from her bank account to Paradise Real Estate.

i. Show the impact on the balance sheet for Long Beach Bank before the $15 million transfer takes place (make sure equity is included on the balance sheet). (3 marks)

ii. Show the impact on the balance sheet for Long Beach Bank after the $15 million transfer takes place (make sure equity is included on the balance sheet). (3 marks)

iii. Does Long Beach Bank and Rachael have a problem after it makes the transfer of funds to Paradise Real Estate's bank account? Explain. (4 marks)

iv. Show the impact on the balance sheet for Blue Ocean Bank after the $15 million transfer takes place (make sure equity is included on the balance sheet). (3 marks)

c) The Paradise Island Central Bank rescues Long Beach Bank by providing it with a short term loan of $5 million.

i. What effect does this have on the Paradise Island banking system? Ie., How much base money is there? (4 marks)

ii. How much broad money is in the Paradise Island banking system? (2 marks)