What is the primary reason for a central bank to increase the reserve requirement ratio of commercial banks?

Correct option is A

The correct answer is: (A) To decrease the money supply in the economy

• The reserve requirement ratio is the percentage of commercial banks' deposits that they are required to hold as reserves (either in cash or at the central bank) and not lend out.
• When the central bank increases the reserve requirement, commercial banks have to hold a higher percentage of their deposits in reserve, reducing the amount of money they can lend out. 

Information Booster:

• To increase the money supply in the economy: This would be the objective of decreasing the reserve requirement.
• To decrease the profitability of commercial banks: While increasing the reserve requirement can impact profitability, the primary goal is to control the money supply.
• To encourage banks to lend more: Increasing the reserve requirement has the opposite effect; it limits the amount banks can lend.