Question

How can a decrease in the required reserve ration increases the money supply?

Answer 1

The Money multiplier = 1/r
r: required reserve ratio

There is an inverse relation between the required reserve ratio and the money multiplier. A fall in the required reserve ratio leads to an increase in the money multiplier. Thiis is because a greater portion of each deposit is available for loaning out.

Given a fixed monetary base, as the money multiplier rises, it leads to increase in money supply.

Fall in required reserve ratio --> Increase in money multiplier --> Increase in money supply