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Many information technology (IT) companies in Hong Kong have closed down in recent years.
(b) Suppose the closing down of many companies leads to a sharp decrease in demand for loans. As a result, some banks cannot lend out their excess reserves.
(i) Explain how the decrease in demand for loans would affect the opportunity cost to these banks of holding excess reserves. (4 marks)
(ii) Using the process of deposit creation, explain how a decrease in demand for loans could affect the deposit creation ability of the banking system. (4 marks)
(c) Suppose the banking system has an excess reserve of $50 million and its balance sheet is as follows:
What is the maximum possible amount of total deposits in the banking system if no banks hold excess reserves? Show your workings. (4 marks)
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