What happens when there is an increase the reserve requirement?

Answer 1

In short, nothing (read more, things do definitely happen). The money supply however changes and by extension the money multiplier changes over time. The way that question is presented however is asking about a direct relationship, which there is none. Absolutely there is an indirect result however.

Increasing the reserve ratio effectively reduces the money supply within the banking world. This results reduced loan availability with reduces investment. Lower investment causes a stagnation in industry. A stagnation in industry causes recession (through countless ways). People are laid off and companies are hesitant to explore markets. Net result? Less spending. With less spending people/businesses in this situation worry more about their long term stability and care less about immediate spending needs. Both industry and individual "tighten" their belt so to speak. No more investment, and therefore the banks continue the cycle. The money multiplier changes to reflect the propensity to save across all fronts.

Basically, an increased ratio requirement results in a lower multiplier factor. Not directly, but that's what happens.

On second thought, I should probably give the simple response that you're going to face in a test. Very simple. Fractional banking infrastructure means that increasing the required reserve reduces loan capacity. Reduced loan capacity results in a propagation of less loan potential. This effect permeates through all of society. The result is that money cannot be "created" by banks/enterprises/individuals as much as before by relying on interest. Hence, the multiplier of money goes down because the velocity of money goes down.

Answer 2

decrease