Suppose there are $1000 of reserves in the banking system. Assume that banks are required to hold 5% of their deposits as required reserves. Assume further, that banks wish to hold zero excess reserves.

a. What is the total amount of deposits in the banking system?

b. If banks decided to hold reserves in excess of those required what would happen to the money multiplier and the money supply? Why?

c. If households decided not to deposit all their money in the bank but to keep some of it in the form of cash outside of the banking system