As the reserve ratio goes up, less money will be created because?

As the reserve ratio goes up, less money will be created because



(a) people will hold less cash

(b) people will hold more cash
The reserve ratio is the % of every $ deposited that a bank has to keep in its reserves, say in case the customer wants to withdraw his money.



It does not directly affect how much cash people hold, so neither A nor B.



Say $100 is deposited and the reserve ratio is 10%. The Bank keeps $10 and loand $90. The borrower spends the $90 and the money comes back into the banking system; his time $9 is kept and $81 is loaned out...



Now if the reserve ratio increases to 20%, when $100 is deposited, $20 is kept and $80 loaned. When this comes back, $16 is kept and $64 loaned out...



As you can clearly see, loan amounts fall.



Answer is D.
The banking system has to keep more cash or bonds as reserve at the banks, and give less loans.The answer should be D. Less loans, less money supply.
The banks will not be able to loan out as much as they could have before the increase in the reserve ratio.%0D%0A