Suppose Regulators Cap the Maximum Interest One Can Charge at 5

question 5

Multiple Choice

Suppose regulators cap the maximum interest one can charge at 5 percent.Let the underlying market interest rate be 8 percent.Charging anything lower will drive you out of business. You devise a compensatory balance scheme: for every $100 that the customer borrows,she will have to keep a certain amount with you as a compensatory balance.What should the amount of the loan and the compensatory balance be if the customer wants to borrow $5,000?

• A) $5,000 loan and $1,000 as compensatory balance
• B) $5,000 loan and $1,500 as compensatory balance
• C) $5,000 loan and $3,000 as compensatory balance
• D) $8,000 loan and $3,000 as compensatory balance
• E) $8,000 loan and $5,000 as compensatory balance

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