Question

In a perfect market, is the quoted borrowing rate equal to the quoted savings rate? What happens to borrowing/lending rates if everybody do not share the same information? What happens to borrowing and lending rates if there is only one seller (bank)? Or if there is only one buyer (firm) borrowing? What is a liquidity premium? Taxes: Would you rather get a dollar of income as ordinary income, dividends, interest or capital gains?

Answer 1

In a perfect market, the borrowing rate and savings rate are same i.e. at equilibrium . In perfect market it is assumed that information flows freely and if information failure happens the equilibrium of the interest rates will shift causing an imbalance in the economy. In case of monopoly of a single bank, he will be the price setter and all the borrowers and depositors have to accept the rate. In case of monoposy, the buyer will command the interest rates.