Suppose the Federal Reserve System has a required reserve ratio of 0.20 and there are no excess reserves in the system.If the Open Market Committee buys $20 million of securities from the commercial banking system,the total lending capacity of the system

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When the Open Market Committee buys $20 million of securities, the commercial banks receive an increase in reserves equal to the purchase amount multiplied by the required reserve ratio (0.20 in this case). Therefore, the increase in reserves is $20 million x 0.20 = $4 million. According to the money multiplier formula, the total lending capacity of the system will increase by the inverse of the required reserve ratio, which is 1/0.20 = 5. Therefore, the total lending capacity will increase by $4 million x 5 = $20 million x 1 = $100 million.

Suppose the Federal Reserve System Has a Required Reserve Ratio