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Money and the banking system I described a monetary system that included simple banks in Section 4-3. Assume the following: i. The public holds no currency. ii. The ratio of reserves to deposits is 0.1. iii. The demand for money is given by M=$Y(0.8-41) Initially, the monetary base is $100 billion, and nominal income is $5 trillion. What is the demand for central bank money?

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Answer:

Given that there are no currency in circulation and the reserves to deposits is 0.1.

The demand for money is given by M=$Y (0.8-41)  

The monetary base is $100 billion  

The nominal income is $5 trillion.

Demand for money is Md = demand for currency + demand for reserves

Demand for money is Md = (currency-deposit ratio + reserve deposit ratio*(1 - currency-deposit ratio)) x Md

Demand for money is Md = (0 + 0.1*(1 - 0)*5000*(0.8 - 4i)

Demand for money is Md = 400 - 2000i

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