The Banking System Currently Has $10 Billion of Reserves, None

Multiple Choice

The banking system currently has $10 billion of reserves, none of which are excess. People hold only deposits and no currency, and the reserve requirement is 10 percent. If the Fed raises the reserve requirement to 12.5 percent and at the same time buys $1 billion worth of bonds, then by how much does the money supply change?

A) It falls by $12 billion.
B) It falls by $19 billion.
C) It falls by $21 billion.
D) It rises by $19 billion.