Two (10 Marks)

Assume that the money multiplier m = (1+c)/(r+e+c). Where c is the currency deposit ratio, e is the excess reserve ratio and r is the required reserve ratio.

a) With examples, explain what will cause an increase in the ratios c, e and r

b) Explain the implications of an increase in each of the ratios on the ability of the

central bank to increase money supply by increasing the monetary base.

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c) Assume that consumers trust in the banking sector improves because of more transparent banking practices. How will this affect the money multiplier and the central banks monetary control?