Suppose all of the banks in the Federal Reserve System have $100 billion in transactions accounts,the required reserve ratio is 0.25,and there are no excess reserves in the system.If the required reserve ratio is changed to 0.20,the total lending capacity of the system is increased by

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With the required reserve ratio decreasing from 0.25 (25%) to 0.20 (20%), banks need to hold less in reserves for each dollar of transactions accounts. Initially, with a 25% reserve requirement, banks must hold $25 billion in reserves ($100 billion * 0.25). When the reserve requirement is reduced to 20%, they need to hold only $20 billion ($100 billion * 0.20). This reduction in required reserves frees up $5 billion ($25 billion - $20 billion) that can be lent out. However, the total lending capacity is determined by the money multiplier, which is the reciprocal of the reserve ratio. The new reserve ratio of 0.20 has a multiplier of 5 (1/0.20). Therefore, the increase in lending capacity is $5 billion * 5 = $25 billion.

Suppose All of the Banks in the Federal Reserve System