Assuming a reserve requirement of 20 percent,if the Fed sells $20 billion in bonds in the open market,the lending capacity of the system will eventually

Question

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If the Fed sells $20 billion in bonds in the open market, banks will need to reduce their reserves by $20 billion (20 percent of $20 billion). This reduction in reserves will result in a decrease in the lending capacity of the system by a multiple of the initial reduction. Given a reserve requirement of 20 percent, the money multiplier is 1/0.2 = 5. Therefore, the lending capacity of the system will decrease by $100 billion (5 times the initial reduction of $20 billion).

Assuming a Reserve Requirement of 20 Percent,if the Fed Sells