Chapter 4: Problem 17

Usury laws tend to (LOS) a) create a shortage of loanable funds b) create a surplus of loanable funds c) make it easier to obtain credit d) have no effect on the amount of loanable funds available

Short Answer

Expert verified

Usury laws tend to create a shortage of loanable funds (option A) by setting the maximum interest rate below the equilibrium rate, subsequently reducing the willingness of lenders to supply funds. This results in a reduced supply of loanable funds, making it more difficult for borrowers to obtain credit.

Step by step solution

Understanding Usury Laws

Usury laws are regulations that limit the interest rate that lenders can charge borrowers. These laws are meant to protect borrowers from excessively high interest rates. However, they also have an impact on the supply and demand for loanable funds in the credit market.

Option A: Create a Shortage of Loanable Funds

Usury laws can create a shortage of loanable funds if the maximum allowable interest rate is set below the equilibrium rate. In this situation, the supply of loanable funds (from lenders) will be lower than the demand for funds (from borrowers), as lenders may not find it profitable to lend at the capped interest rate. This can lead to a shortage of loanable funds in the market.

Option B: Create a Surplus of Loanable Funds

A surplus of loanable funds would mean that there is an excess of funds available for borrowing. Usury laws could potentially create a surplus if the maximum interest rate were set above the equilibrium rate. However, this is highly unlikely, as the purpose of usury laws is to protect borrowers from high interest rates. Thus, in practice, usury laws are more likely to result in a shortage rather than a surplus of loanable funds.

Option C: Make it Easier to Obtain Credit

When the maximum interest rate is capped, it may appear that credit will become more accessible to borrowers, as the cost of borrowing is lower. However, since lenders may be less willing to supply funds at the capped rate, the actual availability of loanable funds may decrease due to the shortage. As a result, it might become more difficult for borrowers to obtain credit, the opposite of what this option suggests.

Option D: Have No Effect on the Amount of Loanable Funds Available

If usury laws were set so that the maximum allowable interest rate was equal to the equilibrium rate in the market, then they could have no effect on the amount of loanable funds available. In this case, the supply and demand for loanable funds would be unaltered. However, this scenario is rather unlikely, as the purpose of usury laws is to curb excessive interest rates, not to maintain the equilibrium rate.

Conclusion

Based on our analysis, the most likely outcome of usury laws is that they will create a shortage of loanable funds (option A) by setting the maximum interest rate below the equilibrium rate, reducing the willingness of lenders to supply funds. This reduced supply makes it more difficult for borrowers to obtain loans, rather than easier as option C suggests. In practice, usury laws are less likely to create a surplus of loanable funds (option B) or have no effect on the amount of loanable funds available (option D).

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