B2

Aussie Finance, a finance company, issues bonds for $50,000 in order to buy $10,000 worth Coca Cola commercial paper at their issue and make $40,000 loan to Brisbane Council.

The bonds are all bought by Mr Smith, a wealthy man, with his accumulated savings. Coca Cola is raising funds for the Christmas parties of its Australian employees. Brisbane Council is raising funds to renovate a parking.

Aussie Finance and Brisbane Council have their bank account at Westpac whereas Coca Cola has a bank account at ANZ.

a) Using a flow-of-funds diagram incorporating the surplus spending units, deficit spending units, financial intermediary, financial markets and the complete payment system, illustrate how the funds and the financial instruments circulate in the financial system. [In your diagram indicate the status of the different entities, make a clear distinction between bank deposits and ESF, and indicate money and instrument creation/destruction where relevant. It is not necessary to represent the RBA.] (9 marks)

b) Draw the changes in the balance sheet of Westpac. (2 marks)

c) Explain which kind of finance this story is. (2 marks)

d) Conclude whether there is money creation. Explain your answer.