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 + 100P (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 = 20 -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 + 100P (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.

1. Equilibrium price (interest rate) before TILSA:  percent

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

3. Equilibrium price (interest rate) after TILSA:  percent

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

Answer 1

Solution :

Before TILSA

Demand is as follows :

Q = 12 - 100P

Supply is as follows :

Q = 5 + 150P

At equilibrium,

Demand = Supply

12 - 100P = 5 + 150P

-100P -150P = 5 - 12

-250P = -7

P = 7/250 = 0.028 or 2.8%

Q = 12 - 100P = 12 - (100 * 0.028) = 12 - 2.8 = 9.2 billion

Hence , The equilibrium price (interest rate) before TILSA is 2.8 percent.

The equilibrium quantity before TILSA is $9.2 billion.

After TILSA

Demand is as follows :

Q = 20 - 100P

Supply is as follows :

Q = 3 + 100P

At equilibrium,

Demand = Supply

20 - 100P = 3 + 100P

-100P - 100P = 3 - 20

-200P = -17

P = 17/200 = 0.085 or 8.5%

Q = 20 - 100P = 20 - (100 * 0.085) = 20 - 8.5 = 11.5

Hence, The equilibrium price (interest rate) after TILSA is 8.5 percent.

The equilibrium quantity after TILSA is $11.5 billion.