If the monetary base of a country is $7,000. People hold half of their money in the form of currency, and commercial banks hold a quarter of their deposits in reserve. Context: long run, closed economy（use the econ 211 knowledge) If people distrust commercial banks and withdraw deposits, and the central bank does not respond, what is the new money supply?

To answer this question, we first need to understand the concept of the money multiplier. In this case, the money multiplier is determined by the reserve ratio, which is the fraction of deposits that banks hold as reserves.

Step 1: Calculate the initial money supply The initial money supply is determined by the monetary base multiplied by the money multiplier. The monetary base is $7,000. The money multiplier is 1 / reserve ratio. Given that banks hold a quarter of their deposits in reserve, the reserve ratio is 0.25. Therefore, the money multiplier is 1 / 0.25 = 4. So, the initial money supply is$7,000 * 4 = $28,000.

Step 2: Calculate the new money supply If people distrust commercial banks and withdraw deposits, they would hold more money in the form of currency. This means that the reserve ratio would increase because the denominator (deposits) decreases while the numerator (reserves) stays the same. If people hold all their money in the form of currency, the reserve ratio becomes 1. Therefore, the new money multiplier is 1 / 1 = 1. So, the new money supply is $7,000 * 1 =$7,000.

Therefore, if people distrust commercial banks and withdraw deposits, and the central bank does not respond, the new money supply would be $7,000.