A) When money is held in cash form, and is not deposited in banks, then banks cannot lend the money to anyone. The money creation process that bank is able to do will hold no value as no money flows to the banks. As a result the money supply will not increase, it will remains same as £1000.

B) When money is deposited in banks, banks can use it to lend to borrowers and increase money supply ,by the process of money creation. However, banks mostly are said to maintain reserve out of deposited amount, which is here given as 100%. Means whatever deposit comes to banks, banks need to hold to and not lend. So ultimately money is not slowing to borrowers and it remains the same as before. Hence money supply is £1000 as similar as before.

C) As now banks need to maintain reserve of 20%. Means banks need to keep £1000×20% = £200 in reserve and lend £800 to borrowers. This process will continue till many rounds. Money will be created in every round. By the basic formula of calculating money multiplier, money supply can be calculated.

Money multiplier = 1/ reserve percentage.

Money multiplier = 1/ 20% = 100/20 =5times

Now money supply will increase 5 times than before. Thus now money supply will be(initial deposit×money multiplier) £1000×5 =£5000.

D) In an OMO (open market operation) when bonds are purchased, it means the private households are given money and in return bonds are issued for that. Thus it will increase money supply in an economy. Thus money supply increases.