Reference no: EM133328173

Question: The Australian government (bank account at West Bank) issues $30,000 face value government bonds for the price of $27,000; the bonds have a two year maturity and pay coupons twice a year. A third of the bonds are bought by West Bank (transaction 1) while the other two thirds are bought by East bank (transaction 2).

Draw the variations in West Bank's balance sheet due to the two transactions above. Use only one single balance sheet and indicate the number of the transaction to which it relate at the end of each entry between brackets [example Notes: + 700 (1) where (1) refers to transaction 1].

Draw a detailed and complete diagram of flow of funds that embeds the two transactions. Present one single diagram and include West Bank, East bank, The Australian government, and the status of all players, bonds, ESF, bank deposits, creation and destruction of money and financial instruments if relevant, financial markets, payment system.

Conclude how the stock of bank deposits and the stock of central bank deposits in the financial system have changed as a result of these two transactions.

Describe how the first amortization of the bonds affects the Australian government's balance sheet. Show the details of your calculation separately.