Question

1. If the government imposed a federal interest rate ceiling of 20% on all loans, who would gain and who would lose? Explain your answer. Why would a government take such an action?

Answer 1

The ceiling on the interest rate refers to the maximum rate of interest that a financial institution can charge a borrower while negotiating a loan. When the government imposed a federal ceiling on interest rate for 20% on all loans it will impact both borrowers and lenders. Borrowers tend to benefit because they could borrow more at lower rate of interest and lenders tends to lose because it makes lending less profitable. The demand and supply model predicts that when the interest rate ceiling is fixed at lower price, the quantity demanded of credit will increase from the original level