Question

Does reducing the collateral of state loan to the borrowers encourage the new entrepreneurs to invest in the market. I was doing the microeconomic homework which asks if this government intervention will help increase the supply in starting businesses, hence decrease the unemployment.  In my opinion, this method can be seen as subsidy , even though the borrowers dont actually receive money to start their business, but they dont have to pay extra as they were supposed to do.

Please correct me if I am wrong ? Thanks

Answer 1

Collateral is something that is pledged as security for repayment of a loan . This collateral is forfeited if there is default . So reducing collateral of state loan means that less security deposit is required . So borrowers get loan at low cost . This will encourage investment . Government intervention by reducing collateral increase businesses and decrease unemployment as production causes more employment . So this is a kind of subsidy indirectly . The borrowers do not get money directly but they have to give less collateral .