Some governments enact usury laws, which hold the interest rate below its equilibrium level. Economic analysis indicates that under such laws,

Question

Quizplus · Accepted Answer

Usury laws create a shortage of loanable funds because the interest rate is held below equilibrium level. This means that there is less incentive for lenders to lend money and more incentive for borrowers to borrow. As a result, there will be more demand for loans than there is supply of loanable funds available at the lower interest rate. This shortage will require rationing by some other means, such as queuing or non-price rationing mechanisms. Therefore, choice D is correct. Savings may increase as borrowing demand falls, but this is not a direct consequence of usury laws. Borrowers would demand less from the loanable funds market but this is only because of the shortage created by the usury laws. Finally, borrowers may be happy with the lower interest rate, but this does not address the issue of the shortage of loanable funds.

Some Governments Enact Usury Laws, Which Hold the Interest Rate