Question

Show the effect of an increase in the student loans interest rate in a figure on the Schooling/Rate plane. Briefly explain the result.\

Answer 1

If interest rate on student loans increases, it decreases quantity of student loans demanded, since the repayment burden on students become higher. This causes an upward movement along the demand curve.

In following graph, interest rate (P) and number of schooling (Q) are shown along vertical and horizontal axis, respectively. Initial position is at point A with initial interest rate P0 and amount of schooling Q0. When interest rate increases to P1, the position moves upward to point B with lower amount of schooling Q1.