Supply and Demand
Consider the model of supply and demand for central bank money. Assume that there there are commercial banks. Suppose that people hold 20% of their money in currency and 80% of their money in deposits. The central bank sets the reserve-to- deposit ratio at 10%. In the first period, the central bank increases the supply of money by $200, buying bonds through Open-Market Operations. For the second period (after the central bank has injected $200 in the economy), calculate: the demand for currency.