In the economy of Panicia, the monetary base is $1,000. People hold a third of their money in the form of currency (and thus two-thirds as bank deposits). Banks hold a third of their deposits in reserve.

One day, fear about the banking system strikes the population, and people now want to hold a third of their money in the form of currency. If central bank does nothing, what is the new money supply?

The new money supply is $1,500

If the monetary base deposit is $1000 and people hold 1/3 of their money, this means that the;

So,  

Reverse deposit ratio = 1/3

Now  

Currency deposit ratio = (cash in cash) ÷ (cash in deposit)

= (1/3) ÷ (2/3)

= 0.5 So,  

money supply =  (currency deposit ratio + 1) ÷ (Reserve deposit ratio + Currency deposit ratio)  × Monetary Base

= (1+1) ÷(1+1/3)   ×  1000

= $1,500

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The new money supply is $1,500

Explanation:

Before we proceed to answer the question according to the scenario painted, we need to make some preliminary calculations as follows;

If the monetary base deposit is $1000 and people hold 1/3 of their money, this means that the;

Reverse deposit ratio = 1/3

Currency deposit ratio = (cash in cash)/cash in deposit = (1/3)/(2/3) = 0.5

Thus mathematically,

money supply =  (currency deposit ratio + 1)/(Reserve deposit ratio + Currency deposit ratio)  × Monetary Base

Money Supply = (1+1)/(1+1/3) *  1000 = $1,500

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answer; the cpi;