In a fractional-reserve banking system, an increase in reserve requirements

A. Increases both the money multiplier and the money supply

B. Decreases both the money multiplier and the money supply

C. Increases the money multiplier, but decreases the money supply

D. Decreases the money multiplier, but increases the money supply

B. Decreases both the money multiplier and the money supply

Explanation:

An increase in reserve requirement decreases the amount of excess reserves in the banking system. This decrease means that there will also be less money for banks to loan out. this will lead to a reduction in money supply. The money multiplier on the other hand is the how a small deposit can result in a greater increase in money supply in the economy. Money multiplier will also decrease in this case. This is how;

Money multiplier = 1 / reserve requirement.

Based on above equation, if reserve requirement goes up, the overall; fraction will be smaller hence a decrease in money multiplier.