For each of the statements below, assess whether the statement is TRUE (always correct), FALSE (always wrong) or UNCLEAR (meaning correct under some circumstances, wrong under other circumstances to define). In 4 to 6 sentences, provide an explanation / illustration of why this is the case. Without an explanation or with an explanation that is off topic or with an explanation that shows serious confusion and misunderstanding, you will receive 0 marks, even if your conclusion was correct.

Your answers must be entirely in words with no balance sheet, no diagram and no equations. The answer must reflect the content of the course and cannot use an outside source. Using copy/paste is strictly forbidden.

a) APRA decreases the countercyclical capital buffer below 1% with immediate effect when it worries that banks may be in trouble in a distant future. [To assess this statement assume that we are after January 2023 and therefore the reforms of Basel III (also known as Basel IV) are operational.]

(2 marks)

b) The purchase of Treasury bonds by the RBA from an insurance company creates new ESF and new bank deposits.

(2 marks)