Final answer:
The money supply in Wiknam is $5000, calculated by summing currency and demand deposits. The monetary base is $2000, the total of the currency held by people and bank reserves. The money multiplier is 4, indicating each dollar of reserve supports $4 of the money supply.
Step-by-step explanation:
In the nation of Wiknam, the money supply includes both currency and demand deposits. Since people hold $1000 in currency and $4000 in demand deposits, the total money supply is $5000 ($1000 + $4000). The monetary base, also known as the reserve base, comprises the currency held by the public plus reserves within the banking system. In this case, it is the sum of the currency held by the people, which is $1000, and the reserves the bank holds.
With a reserve-deposit ratio of 0.25 (or 25%), we multiply the demand deposits by this ratio to find the bank reserves, which is $4000 * 0.25 = $1000. So, the monetary base would be $2000 ($1000 in currency + $1000 in reserves). Lastly, the money multiplier is calculated using the formula 1 divided by the reserve ratio.
Given the reserve ratio is 0.25, the multiplier is 1 / 0.25 = 4. This implies that each dollar of reserve can support generating $4 of the money supply.