Assume that in an economy, people hold $1000 of currency and $4000 of demand deposits in a bank. The reserve-deposit ratio is 0.25 1. What are the money supply, the monetary base and the money multiplier? 2. Suppose that the Fed increase the monetary base by 100$ . What will be the change in the money supply? 3. If the banks become risk-averse and increase the reserve deposit ratio, would the money supply increase as much as in part 2? Explain your intuition? .

1. Assume that in an economy, people hold $1000 of currency and $4000 of demand deposits in a
bank. The reserve-deposit ratio is 0.25 1. What are the money supply, the monetary base and the
money multiplier? 2. Suppose that the Fed increase the monetary base by 100$ . What will be the
change in the money supply? 3. If the banks become risk-averse and increase the reserve deposit
ratio, would the money supply increase as much as in part 2? Explain your intuition?