Final answer:
If banks' desired reserve ratio increases and the public still desires to hold the same amount of currency, the money supply will decrease. So the correct answer is B) decrease.
Step-by-step explanation:
When banks' desired reserve ratio increases, it means that they want to hold a larger proportion of their deposits as reserves. In this scenario, if the desired reserve ratio increases from 0.10 to 0.15, it implies that banks want to hold a higher percentage of their deposits as reserves.
If the public still desires to hold the same amount of currency, it means that the amount of currency in circulation remains unchanged. However, with banks holding a greater proportion of their deposits as reserves, they have less available to lend and create new money through the process of fractional reserve banking.
Therefore, the money supply will decrease because there is less money being created through lending. So the correct answer is B) decrease.
This is because banks will be holding a larger fraction of deposits as reserves rather than lending them out. When banks lend out less money, the overall quantity of loans in the economy decreases, leading to fewer deposits in other banks. Therefore, other banks will also reduce their lending, which in turn diminishes the money-creating capacity of the banking system through the money multiplier effect. In essence, an increase in reserve requirements means that more money is held in reserve and less is available for circulation in the economy.