Banks Use Credit Rationing Rather Than Simply Raising the Interest

question 40

Multiple Choice

Banks use credit rationing rather than simply raising the interest rate charged borrowers with higher default risks because

• A)of fear of adverse selection problems.
• B)of interest rate ceilings in many states.
• C)of fear of offending the loan applicants.
• D)use of credit rationing is encouraged by the Federal Reserve.

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Definitions:

Price Decrease

A reduction in the cost of goods or services compared to previous prices.

Treasury Bonds

Long-term government debt securities with maturity dates typically beyond 10 years, regarded as low-risk investments.

Default Risk

The probability that a borrower will be unable to meet the required payments on their debt obligations.

Maturity Risk

The risk associated with the fixed term of securities; the risk that bond prices will decrease because of rising interest rates as maturity approaches.