Consider the following situation: In a financial market the equilibrium interest rate holds at 17% A usury law is introduced that limits interest rates to 8% What is the effect of this usury law? Select the best answer. Answer 2 Points The usury law is nonbinding and will not create a shortage in this financial market. The usury law is binding and will not create a shortage in this financial market. The usury law is nonbinding and will create a shortage in this financial market. The usury law is binding and will create a shortage in this financial market. Keyboard Shortcuts

Question

Consider the following situation: In a financial market the equilibrium interest rate holds at 17% A usury law is introduced that limits interest rates to 8% What is the effect of this usury law? Select the best answer. Answer 2 Points The usury law is nonbinding and will not create a shortage in this financial market. The usury law is binding and will not create a shortage in this financial market. The usury law is nonbinding and will create a shortage in this financial market. The usury law is binding and will create a shortage in this financial market. Keyboard Shortcuts

Answer 1

To determine the correct answer, let's analyze the situation step by step:### Key Information:1. **Equilibrium interest rate**: 17% (this is the natural market rate where supply and demand for loans are balanced).2. **Usury law**: Limits interest rates to 8% (a legal cap on how high interest rates can go).### Step-by-Step Analysis:- A **binding usury law** means that the legal cap (8%) is below the equilibrium interest rate (17%). This would prevent lenders from charging the market rate of 17%, forcing them to charge no more than 8%.- A **nonbinding usury law** means that the legal cap (8%) is above or equal to the equilibrium interest rate. In this case, the law has no effect because the market rate is already lower than or equal to the cap.In this scenario:- The equilibrium interest rate (17%) is higher than the usury law cap (8%), so the usury law is **binding**.- At an interest rate of 8%, the quantity of loans demanded will increase (because borrowing becomes cheaper), but the quantity of loans supplied will decrease (because lenders earn less profit). This creates a **shortage** in the financial market, as there will be more borrowers seeking loans than lenders willing to provide them.### Correct Answer:**The usury law is binding and will create a shortage in this financial market.**

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