Final answer:
The M1 money supply, which includes currency and checking accounts, would be the most affected by an increase in the reserve requirement ratio. This change impacts the amount of funds banks have available for lending, thus directly influencing the level of demand deposits included in the M1.
Step-by-step explanation:
The reserve requirement ratio is a central bank regulation that sets the minimum amount of reserves that must be held by a commercial bank. The primary aim of modifying the reserve requirement is to influence the money supply within the economy. When the reserve ratio is increased, banks have less money to lend out, which can reduce the money multiplier effect, leading to a contraction in the overall money supply.
In the context of the various measures of money supply, M1 money supply would be the most affected by a change in the reserve requirement ratio, as M1 includes currency and money in checking accounts (demand deposits), which are directly impacted by changes in reserve ratios. M1 does not include savings accounts, which are part of M2 money supply. M2 is a broader measure that includes all of M1 plus savings deposits, time deposits like certificates of deposit, and individual money market mutual fund balances.
Therefore, since M1 is strictly concerned with the most liquid assets, specifically cash and checking deposits, which banks can use to meet reserve requirements, it's the most sensitive to changes in reserve ratios. Higher reserve requirements reduce the funds available for banks to create deposits through loans, thereby directly decreasing the M1 money supply.