Assume we have an economy in which banks would hold 25% of their deposits as reserves. Initially, deposits are $7,000 and currency is $1,000. Now the central bank purchases $500 of bonds from the public, using new currency.

a) Illustrate the first three rounds of deposit creation, assuming that public would like to continue to hold $1,000 of currency. PLEASE incorporate the fact that the central bank purchases $500 of bonds from the public, using new currency.

b) What will money supply ultimately be in this case?

c) Repeat the analysis in (a), but now assume that the public would like to hold a constant ratio of currency to deposits. Briefly explain why the two results are different.