Suppose that banks are required to hold reserves equal to at least 6 per cent of deposits. Also suppose that desired holdings of currency by the non-bank public are 2 per cent of deposits.

a.The simple deposit multiplier

b.The money multiplier

c.If the central bank supplies an additional $40m of bank reserves, what will be the effect on the total money supply?

d.How might a financial panic affect the money multiplier?

How would you expect the central bank to respond in that situation?