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

To determine the correct answer, let's analyze the situation step by step:<br /><br />### Key Information:<br />1. **Equilibrium interest rate**: 17% (this is the natural market rate where supply and demand for loans are balanced).<br />2. **Usury law**: Limits interest rates to 8% (a legal cap on how high interest rates can go).<br /><br />### Step-by-Step Analysis:<br />- 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%.<br />- 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.<br /><br />In this scenario:<br />- The equilibrium interest rate (17%) is higher than the usury law cap (8%), so the usury law is **binding**.<br />- 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.<br /><br />### Correct Answer:<br />**The usury law is binding and will create a shortage in this financial market.**