Frederique, your lecturer, pays EUR330 every quarter to an insurance company DKV based in the Euro monetary zone for an international health insurance protection. She pays the insurance premium by using AUD564 from her transactional account at the CBA. CBA processes the payment using its own Euro-denominated transactional account it holds in its correspondent bank Societe Generale, based in Paris, in the Euro Zone.Assume that CBA has enough funds in its EURO deposit account to process the payment. Does the payment affect the stock of private money and central bank money in Australia? Explain your answers in depth.
Question
Frederique, your lecturer, pays EUR330 every quarter to an insurance company DKV based in the Euro monetary zone for an international health insurance protection. She pays the insurance premium by using AUD564 from her transactional account at the CBA. CBA processes the payment using its own Euro-denominated transactional account it holds in its correspondent bank Societe Generale, based in Paris, in the Euro Zone.Assume that CBA has enough funds in its EURO deposit account to process the payment. Does the payment affect the stock of private money and central bank money in Australia? Explain your answers in depth.
Solution
When Frederique makes a payment of AUD564 (EUR330) from her account at CBA to DKV, it does not directly affect the overall stock of private money and central bank money in Australia. Here's why:
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Private Money: Private money refers to the deposits held by individuals and businesses in banks. In this case, Frederique's payment reduces the amount of money in her account at CBA, but it doesn't change the overall amount of private money in Australia. This is because the money is simply transferred from one entity (Frederique) to another (DKV). It's like if you gave your friend 10, but your friend's money would increase by $10, so the total amount of money between the two of you would stay the same.
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Central Bank Money: Central bank money, also known as high-powered money or base money, consists of currency in circulation and bank reserves held at the central bank. The payment does not affect central bank money as it does not involve a change in the amount of currency in circulation or in bank reserves at the central bank. The transaction is simply a transfer of funds between accounts within the banking system. It's like if you moved $10 from your left pocket to your right pocket - the total amount of money you have doesn't change, it's just in a different place.
In summary, while Frederique's payment results in changes in her personal account and CBA's Euro account, it does not affect the overall stock of private money or central bank money in Australia.
Similar Questions
Frederique, your lecturer, pays EUR330 every quarter to an insurance company DKV based in the Euro monetary zone for an international health insurance protection. She pays the insurance premium by using AUD564 from her transactional account at the CBA. CBA processes the payment using its own Euro-denominated transactional account it holds in its correspondent bank Societe Generale, based in Paris, in the Euro Zone.d. Assume that CBA has not enough funds in its EURO deposit account to process the payment. It convinces Societe Generale to swap EURO and AUD. Societe Generale has an account in AUD in CBA. Draw the changes in CBA's balance sheet when it processes the swap. Does the payment affect the stock of central bank money in Australia? Explain your answers in depth.
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