Assume that the following data describe the condition of the banking system:

Total reserves $200 billion
Transactions deposits $800 billion
Cash held by public $400 billion
Reserve requirement 0.20

By how much could the banks increase their lending activity?
$ billion = ?

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.

To determine by how much the banks could increase their lending activity, we need to calculate the excess reserves that the banks currently hold. Excess reserves are the reserves that banks have in excess of the required reserves.

To find the required reserves, we multiply the transaction deposits by the reserve requirement ratio:

Required Reserves = Transactions deposits * Reserve requirement
Required Reserves = $800 billion * 0.20
Required Reserves = $160 billion

The total reserves are given as $200 billion, so the excess reserves can be calculated as:

Excess Reserves = Total Reserves - Required Reserves
Excess Reserves = $200 billion - $160 billion
Excess Reserves = $40 billion

Therefore, the banks could increase their lending activity by up to $40 billion.