Suppose that the demand for car loans in the Milwaukee area is $10 million per m

Question

Suppose that the demand for car loans in the Milwaukee area is $10 million per month at an interest rate of 10 percent per year, $11 million at an interest rate of 9 percent per year, $12 million at an interest rate of 8 percent per year, and so on. If the supply of loanable funds is fixed at $15 million, what will be the equilibrium interest rate?

percent per year

If the government imposes a usury law and says that car loans cannot exceed 3 percent per year, how big will the monthly shortage (or excess demand) for car loans be?

$million worth of car loans per month

What if the usury limit is raised to 7 percent per year?

$million worth of car loans per month

how do you calculate this?

Explanation / Answer

Interest rate on Loan 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% Demand for Loanable Funds $10 million $11 million $12 million $13 million $14 million $15 million $16 million $17 million $18 million $19 million Supply of Loanable Funds $15 million $15 million $15 million $15 million $15 million $15 million $15 million $15 million $15 million $15 million The table above demonstrates that the demand for loanable funds increases by $1 million for every 1% reduction in the interest rate. The equilibrium interest rate occurs where the demand for loanable funds equals the supply of loanable funds. This occurs at the interest rate of 5%. =========================================================================== Under a usury laws 3 percent per year cap on interest, the excess demand will be $2 million dollars worth of car loans per month. When the usury law is changed to raise the maximum interest rate to 7 percent per year, it is no longer a binding constraint since the equilibrium interest rate is 5 percent per year; thus, there is $0 of excess demand at that usury limit.

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