Why Are Savers Often Unwise in Lending to Borrowers Who

question 22

Multiple Choice

Why are savers often unwise in lending to borrowers who are willing to pay very high interest rates?

• A)Very high interest rates are against the law in many states.
• B)The high tax rates on interest income make high-interest rate loans unappealing to lenders.
• C)Borrowers will usually pay very high interest rates only when inflation is high, which makes the real interest rate on such loans low.
• D)Adverse selection and moral hazard problems reduce the likelihood of repayment on high-interest rate loans.

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Definitions:

Binding Price Ceiling

A government-imposed limit on the price of a product or service that is set below the market equilibrium, leading to shortages and a decrease in supply.

Producer Surplus

The difference between the amount that producers are willing and able to sell a good for and the actual amount they receive due to market price.

Demand

The quantity of a good or service that consumers are willing and able to purchase at various prices during a given time period.

Opportunity Cost

The relinquishment of possible advantages from alternate options upon making a choice.