Which of the following best explains why raising the required reserve ratio results in a decrease in the money supply?
O A. When the required reserve ratio is high, the inflation rate goes up
and people spend less money.
B. When the required reserve ratio is high, banks must loan out a
smaller polition of their reserves, resulting in fewer loans.
C. When the required reserve ratio is high, banks have less incentive
to give loans because they make less profit on these loans.
D. When the required reserve ratio is high, banks charge higher
interest rates that make loans less affordable to many people.

When the required reserve ratio is high, banks must loan out a smaller portion of their reserves resulting in fewer loans.

Explanation:

Required reserve ratio is the amount of liabilities in which a bank must hold on to. The banks are meant to loan very little or none of this reserve ratio.

These reserves are normally kept in vaults and useful for emergency in the case of demand of withdrawal of a huge amount from the bank. This explains why the banks must loan out a smaller portion of their reserves which results in fewer loans.

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