If a central bank raises the reserve requirement for commercial banks, what will likely occur in the interbank lending market and how might this affect the overall money supply in the economy?

When the central bank raises the reserve requirement, banks must hold more money in reserve and have less excess to lend, so they will seek more borrowing in the interbank market; this raises interbank interest rates because demand for those short‑term loans rises. Higher rates make interbank borrowing more expensive, discouraging banks from taking on additional short‑term loans. With fewer funds available to lend to customers, banks cut back on new loans, which shrinks the amount of money they can create through the credit multiplier. For example, if the reserve requirement jumps from 10 % to 12 %, a bank that previously had $8 million in excess reserves now has only $6. 4 million, forcing it to borrow more and reducing the overall money supply.