Principles of Economics 2e
2nd Edition
ISBN: 9781947172364
Author: Steven A. Greenlaw; David Shapiro
Publisher: OpenStax
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Textbook Question
Chapter 27, Problem 6SCQ
Imagine that you are in the position of buying loans in the secondary market (that is, buying the right to collect the payments on loans) for a bank or other financial services company. Explain why you would be willing to pay more or less for a given loan If:
- The borrower has been late on a number of loan payments
- Interest rates In the economy as a whole have risen since the bank made the loan
- The borrower Is a firm that has just declared a high level of profits
- Interest rates in the economy as a whole have fallen since the bank made the loan
Expert Solution & Answer
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Students have asked these similar questions
Predict how each of the following economic changes will affect the equilibrium price and quantity in the financial market for home loans. Sketch a demand and supply diagram to support your answers.
Because of a threat of war, people become uncertain about their economic future.
The overall level of saving in the economy diminishes.
The federal government changes its bank regulations in a way that makes it cheaper and easier for banks to make home loans.
The table below shows the market for credit cards at various interest rates in millions of dollars. What is the equilibrium
interest rate?
Interest
Quantity of Financial Capital Supplied
Quantity of Financial Capital Demanded
Rate
(Lending) ($ millions)
(Borrowing) ($ millions)
9%
$200
$275
10.5%
$205
$255
12.0%
$210
$235
13.5%
$215
$215
15.0%
$220
$195
16.5%
$225
$175
Provide your answer below:
Predict how each of the following economic changes will affect the equilibrium price and quantity in the financial market for home loans. Which curve will shift: supply or demand? In which direction will the curve shift: right or left? (It may help to use a demand and supply diagram to conduct your analysis.)
a. The number of people at the most common ages for home-buying decreases.
b. Rents rise extremely rapidly.
c. Banks that have made home loans find that a larger number of people than they expected are not repaying those loans.
d. Because of a threat of a war, people become uncertain about their economic future.The overall level of saving in the economy diminishes.
e. The federal government changes its bank regulations in a way that makes it cheaper and easier for banks to make home loans.
Chapter 27 Solutions
Principles of Economics 2e
Ch. 27 - In many casinos, a person buys chips to use for...Ch. 27 - Can you name some item that is a store of value,...Ch. 27 - If you are out shopping for clothes and books,...Ch. 27 - For the following list of items, indicate If they...Ch. 27 - Explain why the money listed under assets on a...Ch. 27 - Imagine that you are in the position of buying...Ch. 27 - What are the four functions that money serves?Ch. 27 - How does the existence of money simplify the...Ch. 27 - What is the double-coincidence of wants?Ch. 27 - What components of money do we count as part of...
Ch. 27 - What components of money do we count in M2?Ch. 27 - Why do we call a bank a financial intermediary?Ch. 27 - What does a balance sheet show?Ch. 27 - What are a banks assets? What are its liabilities?Ch. 27 - How do you calculate a banks net worth?Ch. 27 - How can a bank end up with negative net worth?Ch. 27 - What is the asset-liability time mismatch that all...Ch. 27 - What is the risk if a bank does not diversify its...Ch. 27 - How do banks create money?Ch. 27 - What is the formula for the money multiplier?Ch. 27 - The Bring it Home Feature discusses the use of...Ch. 27 - Imagine that you are a barber in a world without...Ch. 27 - Explain why think the Federal Reserve Bank tracks...Ch. 27 - The total amount of U.S. currency in circulation...Ch. 27 - Explain the difference between how you would...Ch. 27 - Should banks have to hold 100 of their deposits?...Ch. 27 - Explain what will happen to the money multiplier...Ch. 27 - What do you think the Federal Reserve Bank did to...Ch. 27 - If you take 100 out of your piggy bank and deposit...Ch. 27 - A bank has deposits of 400. It holds reserves of...Ch. 27 - Humongous Bank is the only bank in the economy....
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- Suppose that owning the building for a year would earn you $8,000. To decide whether you will be better off by owning it for one year and then selling it, you seek advice from three different people: (1) Your brother says that you should not buy the building because in one year it will cost you $150,000. (2) Your accountant says that you should definitely buy the building because you can borrow $150,000 at zero interest while the building will generate $8,000 in extra income. Then when you sell it, you will be $8,000 richer. (3) Your bookkeeper says that if you sell the building in a year, you will have to come up with more money to pay off the loan than you will make in extra income. Keeping in mind that the economy experiences deflation at the rate of 10%, your The extra income you will earn will be less than the cost of owning the t accountant year When the nominal interest rate is zero, you do not incur any cost when brother loan When the nominal interest rate is zero, the cost of…arrow_forwardSuppose you buy a house for $250,000. One year later, the market price for the house has fallen to $200,000. What is the return on your investment in the house if you made a down payment of 10 percent and took out a mortgage loan for the other 90 percent? Use the editor to format your answerarrow_forwardWhy interest rates differ at any given time a range of interest rates prevails in the economy. what four factors contribute to differences in interest rates across consumers?arrow_forward
- EXERCISE 10.9 LIMITS ON LENDING Many countries have policies that limit how much interest a moneylender can charge on a loan. Do you think these limits are a good idea? Who benefits from the laws and who loses? What are likely to be the long-term effects of such laws? Tips: For Question 2, you may think about how a low interest rate would affect the poor and those who owe huge debts. For Question 3, you may think about how it would affect the profitability of the banking sector and the supply of lending (will lenders be encouraged to lend more?), and what implications it may have for "credit rationing" (being credit constrained).arrow_forwardMany countries have policies that limit how much interest a moneylender can charge on a loan. Do you think these limits are a good idea? Who benefits from the laws and who loses? What are likely to be the long-term effects of such laws? Tips: For part 2, you may think about how a low interest rate would affect the poor and those who owe huge debts. For part 3, you may think about how it would affect the profitability of the banking sector and the supply of lending (will lenders be encouraged to lend more?), and what implications it may have for "credit rationing" (being credit constrained).arrow_forwardSuppose a new customer adds $100 to his account at North Central National Bank, which the owners of the bank then use to make $100 worth of new loans. This would increase the loans account and the account.arrow_forward
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