To decrease the money supply, what should the Fed do with the reserve ratio?

Increasing the reserve requirements is the correct approach to decrease the money supply. When the Federal Reserve raises the reserve ratio, it mandates that banks hold a larger percentage of their deposits in reserve and not lend them out. This action decreases the amount of money available in the banking system for loans and other financial activities, ultimately leading to a contraction in the money supply. With less money circulating, the overall liquidity in the economy is reduced, which can help combat inflation and stabilize prices.

By imposing higher reserve requirements, the Fed directly influences banks' ability to create new loans, thereby tightening credit conditions and discouraging borrowing. This is a tool commonly used by the Fed to manage economic growth and control inflationary pressures within the economy.