Discuss the effect of a cap (ceiling) of interest rate on the lender, borrower and how...
Discuss the effect of a cap (ceiling) of interest rate on the lender, borrower and how the cap can cause inefficiency (loss of total surplus).
Homework Answers
Ans. Interest rate ceiling is mainly done in order to reduce the interest rates at which loans are lend by Banks or other financial institutions. This cap would mean a profit reduction to Lender as the interest they earned before was high. This cap would be very positive for borrowers because they would now get loans at a lesser interest rate. This cap would cause inefficiency because at the level of ceiling , demand for loans would be high than the supply of loans ie there would be a shortage in the market and there would be a deadweight loss too. This would lead to inefficiency ie loss of Total surplus.
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Discuss the effect of a cap (ceiling) of interest rate on the
lender, borrower and how...
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