Question

The markets are usually a good way to organize economic activity. In financial markets, this may mean that in some markets, the interaction between supply and demand of loanable funds results in a very high-interest rate. Consider, for example, the market for loans for bail bonds. When a person is imprisoned and needs to post bail, he/she may want to borrow money to be able to post the bail. Given your understanding of the market for loanable funds, do you expect the supply of funds available for loan for bail bonds to be high or low? Please explain in detail why the prevailing interest rate in the bail loan market would be low or high as well.

Answer 1

In the market for loans for bail bonds, the low supply of funds available for loan because this is found to be riskier way of lending. Therefore, there are very less number of lenders in the market who are willing to give loans for the bail bonds.

We know that the interest rate is determined by the supply of funds and demand for funds in the loan market. Since, the supply of funds for bail bonds is less or low, so an increase in the demand for the loanable funds for bail bonds will lead to an increase in the interest rate in the market. This means that the borrowing for bail bonds become more expensive because of the higher interest rate.