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(a) Construct a balance sheet for an Australianbank consisting of four items (loans, reserves, deposits, capital).In Year 1, this balance sheet hasthe following characteristics: Total
- (a) Construct a balance sheet for an Australianbank consisting of four items (loans, reserves, deposits, capital).In Year 1, this balance sheet hasthe following characteristics:
Total assets = $1000m
Ratio of capital to assets = 20%
Ratio of Reserves to total assets = 10%
(b) Suppose that inYear 1
- half of deposits were denominated in US dollars and half in Australian dollars
- the exchange ratein that yearwas $1 US = $1 Australian
What happens to the balance sheet inYear 2 if the Australian dollar exchange rate depreciates by 10% against the USdollar, so that now $1 Australian =$0.90 US. (Hint: you need to express all items on the balance sheet interms ofAustralian dollars.)
(c) Using this example, explain why widespread foreign currency borrowing can put an economy at risk of a financial crisis.
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