Consider an economy in which banks would like to hold 25% of their deposits as reserves. Initially, deposits are $7,000 and currency is $1,000. Now the central bank purchases $500 of bonds from the public, using new currency. a) Illustrate the first three rounds of deposit creation, assuming that public would like to continue to hold $1,000 of currency. What will M ultimately be in this case? b) Repeat the analysis in (a), but now assume that the public would like to hold a constant ratio of currency to deposits. Briefly explain why the two results are different.

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