Final answer:
The statement is true; higher customer cash withdrawals reduce the amount of money banks can lend out and thus the amount they can create through loans. This relationship is part of the fractional reserve banking system and is influenced by reserve requirements and potential bank runs.
Step-by-step explanation:
The statement 'The higher the cash withdrawal by customers, the less money can be created by the banks' is true. Banks operate on the principle of fractional reserve banking, meaning they keep only a fraction of their deposits in reserve and lend out the remainder. However, when customers withdraw cash, that reduces the amount that banks have available to lend. If banks have less money to lend, they cannot create as much money through loans. This is because the process of lending and the subsequent spending and redepositing of money create more money in the economy, known as the money multiplier effect.
The fear and uncertainty about a bank's ability to survive can lead to a bank run, where depositors withdraw funds en masse, potentially causing the bank to fail if it cannot meet the withdrawal demands. The more cash is kept in the bank's vault, the less is available for lending, which consequently would mean the bank stands to make less money from interest on loans.
Additionally, regulatory measures such as reserve requirements can impact this process. If reserve requirements increase, banks must hold more deposits in reserve, which also decreases the amount they have available to lend out and thus reduces the money supply in the economy.