Question

Suppose that, prior to the passage of the Truth in Lending Simplification Act and Regulation Z, the demand for consumer loans was given by Q^d_pre-TILSA = 12 -100P (in billions of dollars) and the supply of consumer loans by credit unions and other lending institutions was Q^S_pre-TILSA = 5 + 150P (in billions of dollars). The TILSA now requires lenders to provide consumers with complete information about the rights and responsibilities of entering into a lending relationship with the institution, and as a result, the demand for loans increased to Q^d_post-TILSA = 18 -100P (in billions of dollars). However, the TILSA also imposed “compliance costs” on lending institutions, and this reduced the supply of consumer loans to Q^S_post-TILSA = 3 + 150P (in billions of dollars).

Based on this information, compare the equilibrium price and quantity of consumer loans before and after the Truth in Lending Simplification Act.(Note: Q is measured in billions of dollars and P is the interest rate).

Instruction: Enter your responses for the equilibrium price in percentage terms, and round all responses to one decimal place.

Equilibrium price (interest rate) before TILSA: ____ percent

Equilibrium quantity (in billions of dollars) before TILSA: $ ___ billion

Equilibrium price (interest rate) after TILSA: _____percent

Equilibrium quantity (in billions of dollars) after TILSA: $ _____billion

Answer 1

Answers:

Equilibrium price (interest rate) before TILSA: 2.8 percent

Equilibrium quantity (in billions of dollars) before TILSA: $9.2 billion

Equilibrium price (interest rate) after TILSA:6 percent

Equilibrium quantity (in billions of dollars) after TILSA: $12 billion

.

Explanation:

Before Tilsa

Qd= 12 -100P

Qs= 5 + 150P

.

At equilibrium

Qd = Qs

12 -100P = 5 + 150P

250P= 7

P= 7 / 250

P= 0.028

Equilibrium price (interest rate) = 0.028 * 100%

=2.8%

.

Equilibrium quantity (in billions of dollars) before TILSA= 12 -100P

=12 - 100(0.028)

=12-2.8

=$9.2 Billion

.

Qdpost-TILSA = 18 -100P

QSpost-TILSA = 3 + 150P

18 -100P = 3 + 150P

250P= 15

P= 15/250

P=0.06

Equilibrium price (interest rate) after TILSA= 0.006 * 100

=6%

.

Equilibrium quantity (in billions of dollars) after TILSA= 18-100(0.06)

= 18 - 6

=$12 Billion

.

.

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