Question

H8 Q7

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 = 10 -80P (in billions of dollars) and the supply of consumer loans by credit unions and other lending institutions was QSpre-TILSA = 4 + 120P (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 = 16 -80P (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 + 120P (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

At equilibrium we have

10 – 80P = 4 + 120P

6 = 200P

P = 0.03 or 3%

Q = 10 – 2.4 = 7.6 billion of dollars

New demand Qdpost-TILSA = 16 -80P (in billions of dollars) and new supply of consumer loans QSpost-TILSA = 2 + 120P (in billions of dollars).

16 – 80P = 2 + 120P

14 = 200P

P = 7% or 0.07

Q = 10.4 billion of dollars

Hence,
Equilibrium price (interest rate) before TILSA: 3 percent

Equilibrium quantity (in billions of dollars) before TILSA: $7.6 billion

Equilibrium price (interest rate) after TILSA:  7 percent

Equilibrium quantity (in billions of dollars) after TILSA: $10.4 billion