To help offset the costs from loan defaults, the First National Bank of Gotham decides to increase the interest rate it charges on its business loans. As a result of this increase in the interest rate, the creditworthiness of Gotham's loan applicants is likely to
A)improve.
B)deteriorate.
C)be unchanged.
D)be unchanged, unless the economy enters a recession at the same time as the interest rate is increased.

Question

Quizplus · Accepted Answer

By increasing the interest rate on business loans, the bank is effectively making it more expensive and more difficult for businesses to borrow money. This will likely deter some businesses from applying for loans, and those that do apply may be riskier borrowers who are willing to pay the higher interest rate. Therefore, the creditworthiness of Gotham's loan applicants is likely to deteriorate.

To Help Offset the Costs from Loan Defaults, the First