Assume that all commercial banks are lending as much as they can at the current liquidity ratio. If total cash deposits in the banking system are constant and the liquidity ratio is increased from 20% to 25%, the money supply will

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When the liquidity ratio increases, banks must hold a larger fraction of deposits as reserves and can lend out less, leading to a decrease in the money supply. The specific percentage decrease in the money supply cannot be directly inferred from the change in the liquidity ratio without more information about the money multiplier effect. However, the increase in the liquidity ratio from 20% to 25% means banks are holding more money back, thus reducing the amount available for lending, which in turn decreases the money supply. The options provided do not accurately calculate the effect based on the money multiplier formula, but the principle that the money supply decreases is correct.

Assume That All Commercial Banks Are Lending as Much as They