What are the effects if the interest rate ceiling is set above the equilibrium rate of...

What are the effects if the interest rate ceiling is set above the equilibrium rate of interest? (Think back to our earlier discussion of rent control and other price controls.)

Solutions

Expert Solution

It will not have any impact on equilibrium interest rate and loanable funds.

Interest rate ceiling means, maximum interest rate upto which interest rate should be charged. Actual equilibrium is less than maximum ceiling which means it will not impact market outcome.

Under price ceiling, when price ceiling is set above equilibrium, it is known as non binding price ceiling which means there will be no impact on market outcome.

In this case supply of savings will be less than demand for investment. As a result there will be less investment. Consequently future supply of goods and employment rate will fall. Growth rate will suffer and prices will fall due to lack of AD.

Rahul Sunny answered 2 years ago

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