Imagine that West Bank starts with no existing assets, liabilities or equity. West Bank makes a loan of $1,000 to its customers (transaction 1). West Bank is aiming at backing up 8% of its loans with equity, through the issue of shares to customers of East Bank (transaction 2). West Bank is aiming at backing up 10% its overall deposits with ESF, that need to be borrowed from East Bank, if needed. (transaction 3)

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1. Draw the variations in West Bank's balance sheet due to the three transactions above, with a choice of numbers that comply with its objectives (do not put % in the balance sheet but actual numbers that you have calculated yourself). 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] .

1. Draw a diagram of flow of funds that embeds the three transactions. You present one single diagram and include West Bank, East bank, shareholders, ESF, bank deposits, creation and destruction of money and financial instruments, financial markets, payment system.

1. 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 three transactions. Explain your answers.