Suppose that the government directs the central bank to put into circulation 10 million dollars identical paper notes. The central bank prints the dollars and distributes them to the populace.

a) If the reserve-deposit ratio, which is bank reserves divided by deposits, is 10 per cent. What is the money supply in the country?

b) During the Christmas season people choose to hold unusually large amounts of currency for shopping. The citizens in the country will hold a total of 5 million dollars in the form of currency and to deposit the rest of their money in banks. With no action by the central bank (Banks keep reserves equal to 10 per cent of deposits), how would this change in currency holding affect the national money supply?

c) in part a) what is the money supply in the country, if the reserve-deposit ratio is 5 per cent? Why money supply now is more than that is part b)?