03 eco ce Q.11b(i)

one thing you should be careful !!!

please look at the question again and read it carefully:

"Explain how the decrease in demand for loans would affect the opportunity cost to these banks of holding excess reserves"

*****The question aimimg to ask you the change in opportunity cost of "holding excess reserve"**** 你睇真d 呢句!!!!

you should know that originally, if there is sufficient demand for the loans and the bank holds the excess reserve, the opportunity cost world be the "interest ".

But now, many companies closed down and there is insufficient demand for the loans and there will be excess reserve in the bank,
then the opportunity cost is not the "interest" anymore, as there is not enough demand for the loans, so the opportunity cost for holding excess reserve is null (assuming that the bank will only lend money for earing).

So, the main focus is the occurence of the financial crisis,
lead to the decrease demand in the loans.