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Chapter 4: Q.6 (page 104)

If a usury law limits interest rates to no more than 35%, what would the likely impact be on the amount of loans made and interest rates paid

Short Answer

Expert verified

A 35 percent interest rate cap would be impossible to enforce if market interest rates were maintained in their regular range. If the equilibrium interest rate is larger than 35%, the rate is capped at that level, and the number of accessible loans is less than the equilibrium quantity, resulting in a loan shortage.

Step by step solution

01

Definition

Loanable Funds Market:

The government, corporations, and individuals seeking loans are the consumers in the loanable funds market. The suppliers are banks and other financial institutions that want to lend money. These two interact to arrive at the optimal interest rate and loan quantity.

02

Explanation

There will be no influence on the marketplace for loanable funds if the market's equilibrium rate of interest is already below 35%. A 35 percent charge per unit cap wouldn't be enforceable if market interest rates remained in their typical range. If the equilibrium charge per unit rose above 35%, the charge per unit would be restricted at that level, and also the number of loans would be but the equilibrium number, leading to a loan shortage.

03

Conclusion

Therefore, the quantity of money supplied exceeds the quantity of money required when the interest rate is above the equilibrium level. People who have a lot of money want to get rid of it by purchasing other financial assets.

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Most popular questions from this chapter

During a discussion several years ago on building a pipeline to Alaska to carry natural gas, the U.S. Senate passed a bill stipulating that there should be a guaranteed minimum price for the natural gas that would flow through the pipeline. The thinking behind the bill was that if private firms had a guaranteed price for their natural gas, they would be more willing to drill for gas and to pay to build the pipeline.

a. Using the demand and supply framework, predict the effects of this price floor on the price, quantity demanded, and quantity supplied.

b. With the enactment of this price floor for natural gas, what are some of the likely unintended consequences in the market?

c. Suggest some policies other than the price floor that the government can pursue if it wishes to encourage drilling for natural gas and for a new pipeline in Alaska.

Why is a living wage considered a price floor? Does imposing a living wage have the same outcome as a minimum wage?

Why are the factors that shift the demand for a product different from the factors that shift the demand for labor? Why are the factors that shift the supply of a product different from those that shift the supply of labor?

Which of the following changes in the financial market will lead to an increase in the quantity of loans made and received:

a. a rise in demand

b. a fall in demand

c. a rise in supply

d. a fall in supply

Identify each of the following as involving either demand or supply. Draw a circular flow diagram and label the flows A through F. (Some choices can be on both sides of the goods market.)

a. Households in the labor market

b. Firms in the goods market

c. Firms in the financial market

d. Households in the goods market

e. Firms in the labor market

f. Households in the financial market
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