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 = 10 -80P (in billions of dollars) and the supply of consumer loans by credit unions and other lending institutions was Q^S_pre-TILSA = 4 + 80P (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 = 22 -80P (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 = 2 + 80P (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

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 = 10 -80P (in billions of dollars)

Supply of consumer loans was given by Q^S_pre-TILSA = 4 + 80P (in billions of dollars)

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

10 -80P = 4 + 80P

80P + 80P = 10 - 4

160P = 6

P = 6 / 160 = 0.0375

The equilibrium price in percentage = 0.0375 * 100 = 3.75% = 3.8% (Rounding to one decimal place)

The equlibrium 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 =10 -80P

= 10 - 80(0.0375)

= 10 - 3 = $ 7 billion

After:

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

Demand for consumer loans was given by Q^d_post-TILSA = 22 -80P (in billions of dollars)

Supply of consumer loans was given by Q^S_post-TILSA = 2 + 80P (in billions of dollars)

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

22 -80P = 2 + 80P

80P + 80P = 22 - 2

160P = 20

P = 20 / 160 = 0.125

The equilibrium price in percentage = 0.125 * 100 = 12.5% (Rounding to one decimal place)

Summarizing:

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

Equilibrium price (interest rate) before TILSA: 3.8 percent

Equilibrium quantity (in billions of dollars) before TILSA: $ 7 billion

Equilibrium price (interest rate) after TILSA: 12.5 percent