Question

14-1 Suppose interest rates on residential mortgages of equal risk were 8% in California and 10% in New York. Could this differential persist? What forces might tend to equalize rates? Would the same differentials exist in business risk? Why would this differential be different?

Answer 1

Answer To Problem 1Q:-

1. Yes the difference of the residential mortgage rate of two different Cities can be persisted.
2. There are certain forces like demand and Supply that can lead to the rate to be equal.
3. No, the cost of money borrows for the business purpose doesn't lead to the same risk as the money should be borrowed from the place which charges the less interest.
4. The large firm of New york  and California will prefer to take loan which has the less cost of money.
5. To borrow the money less interest rate is better and to invest the money high interest rate is better

Explanation of Solution:-

The differeces of the interest rates totally depend upon the demand and supply of financial product that prevail in the market

The incerese in supply leads to decrease in interest rate of New york and rate will be equalized

The incerese in Demand leads to decrease in interest rate of New york and rate will be equalized

The Business might take into considarations of the cheapest available mortgages

The center which provides the money at the lowest possible cost should be prefered by the large business firms and the interest rate will be equlized and small firms will be able to get the loan at the lowest cost

Conclusion

Hence, to invest money the higher interest rate should be preferred and to borrow the money lower interest rate should be prefereed and these interest rates has and effect from the demand and supply of product.