Reference no: EM133115798

Tree Lodge had its visitor centre destroyed during the bushfire of 2019. Tree Lodge intends to rebuild it thanks to the money raised through a loan of AUD 2,000,000 from Top Bank, an Australian commercial bank (transaction A) and public donations from households' savings for AUD 500,000 (transaction B).

Top Bank issues $1,700,000 bonds (transaction C), all bought by Queensland state government, which recently had exceptionally high royalties from the mining sector well above its expenses and real investment.

Tree Lodge has a deposit account at Top Bank. Queensland state government has a deposit account at Bottom Bank, another Australian commercial bank. Half of the households making donations have their deposit accounts at Top Bank, while the other half have their deposit accounts at Bottom Bank.

-Draw the changes in Top Bank's balance sheet and in Tree Lodge's balance sheet resulting from transactions A, B and C. [Clearly indicate the name of the item affected in the balance, the change in the value and between brackets the letter of the transaction.] No explanation is required.

-Represent one diagram of flow of funds for all the transactions above represented together. [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. No explanation is required.

-Discuss whether the public donations from households to Tree Lodge represent direct finance. Provide a precise and complete account of your reasoning.

-Identify which components of the story constitute channelling of funds in the financial system. Do funds transit in a financial intermediary? Provide a precise and complete account of your reasoning.

-Discuss whether the story constitutes a case of funding of the economy by net creation of private money. Provide a precise and complete account of your reasoning.