Final answer:
Raising the reserve ratio requires banks to hold more money in reserve, decreasing what is available for loans and circulation, thus reducing the money supply. Raising interest rates through open market operations makes borrowing more expensive, also leading to a reduced money supply as businesses and consumers decrease borrowing and spending.
Step-by-step explanation:
If the Central Bank decides to raise the reserve ratio and raise interest rates, the effect on the money supply would be contractionary. Reserve requirements dictate the amount of funds that banks must hold in reserve and not lend out. Raising these requirements means that banks have to hold more money in reserve, which reduces the amount available for loans and circulation. Consequently, the money supply in the economy is reduced because less money is being multiplied through the banking system's loan-creation process.
To raise interest rates, the Central Bank performs open market operations which affect bank reserves. By selling securities, they can remove reserves from the banking system, making loanable funds scarcer and consequently raising the cost of borrowing, which is reflected in higher interest rates. Higher interest rates make borrowing more expensive, and as a result, businesses and consumers are likely to borrow and spend less, leading to a decrease in the overall money supply.