In order to be binding,an interest rate ceiling must:
A) shift the supply of savings function outward.
B) shift the demand to borrow function outward.
C) be placed above equilibrium.
D) be placed below equilibrium.

Question

Quizplus · Accepted Answer

An interest rate ceiling is a maximum limit placed on the interest rate that can be charged on loans. It is typically introduced to protect borrowers from excessively high interest rates. However, if the ceiling is placed above the equilibrium interest rate, it will have no effect on the market as it will not bind. For a ceiling to be binding, it must be set below the equilibrium interest rate. This will create a shortage of loans as the demand for loans will exceed the supply of savings. As a result, lenders will ration the loans they have available, and borrowers will compete for them by offering a higher price (i.e., interest rate). Therefore, a binding interest rate ceiling will shift the demand to borrow function outward.

In Order to Be Binding,an Interest Rate Ceiling Must