Question

In the economy of Robberia, the monetary base is $2,000. People hold half of their money in the form of currency (and thus half as bank deposits). Banks hold a quarter of their deposits in reserve. One day, a rash of street robberies strikes fear in the population, and people now want to hold only a fifth of their money in the form of currency. If the central bank does nothing, what is the new money supply? Money Supply = $

Answer 1

A country's money supply consists of items that can be used as a medium of exchange for example currency, demand deposits, and saving account deposits.

Now we are given the following information

Monetary base	2000
Money in the form of currency	(1/2)x2000 = 1000
Deposits in Bank	(1/2)x2000 = 1000
Reserve	(1/4)x1000 = 250
Total money supply	Monetary Base - Reserve = 1750

Since the demand and saving account deposits are part of the money supply, so even when people start to hold less of money in the form of currency and more of it in the form of deposits there will be no change in the money supply.