Final answer:
The required reserve ratio and money supply have an inverse relationship. An increase in reserve requirements reduces the money supply as banks hold more money, while a decrease allows banks to lend more, potentially increasing the money supply.
Step-by-step explanation:
The required reserve ratio and money supply have an inverse relationship. When the Federal Reserve raises the reserve requirement, banks must hold a greater portion of their deposits as reserves.
This action decreases the banks' ability to lend money, thereby reducing the money supply in the economy. Conversely, lowering the reserve requirement increases the potential for loan creation and thus expands the money supply.
It's important to note that the actual impact on the money supply can vary due to macroeconomic conditions and the bank's own decisions to hold extra reserves, especially in times of economic uncertainty or recession.
An increase in reserve requirements means that more money is held in banks and less is available for circulation, which tends to reduce the money supply. Alternatively, a decrease in reserve requirements allows banks to lend out more money, thus potentially increasing the money supply.