5. Money Supply: An economy has a monetary base of 1000 $1 bills.

Calculate the money supply in scenarios (a){(d) and then answer part (e).

a All money is held as currency.

b All money is held as demand deposits. Banks hold 100 percent of deposits as reserves.

c All money is held as demand deposits. Banks hold 20 percent of deposits as reserves.

d People hold equal amounts of currency and demand deposits. Banks hold 20 percent

of deposits as reserves.

e The central bank decides to increase the money supply by 10%. In each of the above

four scenarios, how much should it increase the monetary base?

6. Money Demand and Money Supply In the economy of Paniccia, the mon-

etary base is $1000. People hold a third of their money in the form of currency (and thus

two-thirds as bank deposits). Banks hold a third of their deposits in reserve.

1. What are the reserve-deposit ratio, the currency-deposit ratio, the money multiplier,

and the money supply?

2. One day, fear about the banking system strikes the population, and people now want

to hold half their money in the form of currency. If the central bank does nothing,

what is the new money supply?

3. If, in the face of this panic, the central bank wants to conduct an open-market operation

to keep the money supply at its original level, does it buy or sell government bonds?

Calculate, in dollars, how much the central bank needs to transact.