To determine how much the banks could increase their lending activity, we need to calculate the excess reserves. Excess reserves are the reserves held by banks above the required reserve ratio.
1. Calculate the required reserves:
Required reserves = Transactions deposits * Reserve requirement
Required reserves = $800 billion * 0.20
Required reserves = $160 billion
2. Calculate the excess reserves:
Excess reserves = Total reserves - Required reserves
Excess reserves = $200 billion - $160 billion
Excess reserves = $40 billion
The banks could increase their lending activity by $40 billion.