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 Qdpre-TILSA = 14 -90P (in billions of dollars) and the supply of consumer loans by credit unions and other lending institutions was QSpre-TILSA = 6 + 70P (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 Qdpost-TILSA = 26 -90P (in billions of dollars). However, the TILSA also imposed “compliance costs” on lending institutions, and this reduced the supply of consumer loans to QSpost-TILSA = 2 + 70P (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

Before:

Prior to the passage of the Truth in Lending Simplification Act and Regulation Z,

Demand for consumer loans was given by Q^d_pre-TILSA = 14 -90P (in billions of dollars)

Supply of consumer loans was given by Q^S_pre-TILSA = 6 + 70P (in billions of dollars)

To get the equilibrium price we equate the Demand for consumer loans = Supply of consumer loans

14 -90P = 6 + 70P

90P + 70P = 14 - 6

160P = 8

P = 8 / 160 = 0.05

The equilibrium price in percentage = 0.05 * 100 = 5%

The equilibrium quantity can be found out by substituting equilibrium price in either Q^d_pre-TILSA or Q^S_pre-TILSA

Substituting it in Q^d_pre-TILSA = 14 -90P

= 14 -90 (0.05)

= 14 - 4.5 = $ 9.5 billion

After:

After to the passage of the Truth in Lending Simplification Act and Regulation Z,

Demand for consumer loans was given by Qdpost-TILSA = 26 -90P (in billions of dollars)

Supply of consumer loans was given by QSpost-TILSA = 2 + 70P (in billions of dollars)

To get the equilibrium price we equate the Demand for consumer loans = Supply of consumer loans

26 -90P = 2 + 70P

90P + 70P = 26 - 2

160P = 24

P = 24 / 160 = 0.15

The equilibrium price in percentage = 0.15 * 100 = 15%

The equilibrium quantity can be found out by substituting equilibrium price in either Qdpost-TILSA or QSpost-TILSA

Substituting it in Qdpost-TILSA = 26 -90P

= 26 -90 (0.15)

= 26 - 13.5 = $ 12.5 billion

Summarizing:

My responses for the equilibrium price in percentage terms, and rounding all responses to one decimal place.

Equilibrium price (interest rate) before TILSA: 5 percent

Equilibrium quantity (in billions of dollars) before TILSA: $ 9.5 billion

Equilibrium price (interest rate) after TILSA: 15 percent

Equilibrium quantity (in billions of dollars) after TILSA: $ 12.5 billion