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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The decrease in the required reserve ratio from 0.25 to 0.20 frees up 5% of the $100 billion in transactions accounts, which is $5 billion. This $5 billion can be used to create new loans, and with a reserve ratio of 0.20, the money multiplier is 5 (1/0.20). Therefore, the total increase in lending capacity is $5 billion * 5 = $25 billion.

Suppose All of the Banks in the Federal Reserve System