Question

Suppose that, prior to the passage of the Truth in Lending Simplification Act and Regulation Z, the demand for consumer loans was given by Q^d_pre-TILSA = 8 -80P (in billions of dollars) and the supply of consumer loans by credit unions and other lending institutions was Q^S_pre-TILSA = 4 + 80P (in billions of dollars). The TILSA now requires lenders to provide consumers with complete information about the rights and responsibilities of entering into a lending relationship with the institution, and as a result, the demand for loans increased to Q^d_post-TILSA = 22 -80P (in billions of dollars). However, the TILSA also imposed “compliance costs” on lending institutions, and this reduced the supply of consumer loans to Q^S_post-TILSA = 2 + 80P (in billions of dollars).

Based on this information, compare the equilibrium price and quantity of consumer loans before and after the Truth in Lending Simplification Act.(Note: Q is measured in billions of dollars and P is the interest rate).

Instruction: Enter your responses for the equilibrium price in percentage terms, and round all responses to one decimal place.

Equilibrium price (interest rate) before TILSA: percent

Equilibrium quantity (in billions of dollars) before TILSA: $ billion

Equilibrium price (interest rate) after TILSA: percent

Equilibrium quantity (in billions of dollars) after TILSA: $ billion

Answer 1

Q^d_pre-TILSA = 8 -80P

Q^S_pre-TILSA = 4 + 80P

Equilibrium before:

Q^d_pre-TILSA =Q^S_pre-TILSA

8-80P= 4+80P

4= 160P

P*= 4/160 x 100= 2.5% (0.025) Equilibrium price Before

Q*= 8-80(0.025)= 8-2= $6 billion Equilibrium quantity

Q^d_post-TILSA = 22 -80P

Q^S_post-TILSA = 2 + 80P

Equilibrium after:

Q^S_post-TILSA = Q^d_post-TILSA

2+80P= 22-80P

160P= 20

P**= 20/160 x 100= 12.5% (0.125) Equilibrium price after

Q**= 2+80(0.125)= 2+10= $12 billion Equilibrium quantity after

Equilibrium price (interest rate) before TILSA: 2.5percent

Equilibrium quantity (in billions of dollars) before TILSA: $6 billion

Equilibrium price (interest rate) after TILSA: 12.5 percent

Equilibrium quantity (in billions of dollars) after TILSA: $ 12 billion