Question

Suppose that a price ceiling on interest rates is imposed at 25%. Which of the following is true?

Select all that apply:

• If the equilibrium interest rate in the market is 20%, the price will effectively rise to the ceiling level of 25%.

• If the equilibrium interest rate in the market is 30%, the price will effectively be lowered to the ceiling level of 25%.

• If the equilibrium interest rate in the market is 35%, the price will remain at 35%.

• If the equilibrium interest rate in the market is 20%, the price will remain at 20%.

Answer 1

Answer

Option 2 and 4

If the equilibrium interest rate in the market is 30%, the price will effectively be lowered to the ceiling level of 25%.

If the equilibrium interest rate in the market is 20%, the price will remain at 20%

A price ceiling is a maximum price can a seller charge so it is effective if it is below the equilibrium price and it decreases the price but if it is above then it will not change.

Answer 2

Based on the information provided, the correct statements are:

1. If the equilibrium interest rate in the market is 20%, the price will effectively rise to the ceiling level of 25%.

2. If the equilibrium interest rate in the market is 30%, the price will effectively be lowered to the ceiling level of 25%.

Explanation:

• A price ceiling is a government-imposed limit on the maximum price that can be charged for a particular good or service, in this case, the interest rate.

• When the equilibrium interest rate in the market is below the price ceiling (e.g., 20%), there is no immediate impact. The market operates freely, and the interest rate remains at its equilibrium level.

• However, if the equilibrium interest rate exceeds the price ceiling (e.g., 30%), the interest rate is forced to be lowered to the ceiling level. This is because the price ceiling restricts the interest rate from rising above 25%.

• Therefore, the interest rate will effectively rise to the ceiling level (25%) when it is below the ceiling, and it will be lowered to the ceiling level when it exceeds the ceiling.

• The statement about the equilibrium interest rate of 35% is not valid because it exceeds the price ceiling of 25%. In this case, the interest rate would be forced to be lowered to the ceiling level of 25%, not remain at 35%.

• Similarly, if the equilibrium interest rate is already at the price ceiling level (20% in this case), there would be no change, and the price would remain at 20%.

So, statements 1 and 2 are true, while statements 3 and 4 are not applicable or valid in this context.