Question

A ceiling on interest rates is likely to lead to a. an increase in lending activity. b. more rapid capital formation by business. c. increases in hiring of labor. d. a shortage of loanable funds.

Answer 1

Answer:

a. an increase in lending activity.

Explanation:

Interest rate caps (ceilings) are a normative in adjustable-rate mortgage agreements. They define the maximum interest rate permitted in the loan period.

Since they evidently benefit the borrowers (they will never have an exorbitant interest rate), that gives them the incentive to borrow. On the other hand, banks become more secure that the borrowers will not default the loan (when the interest rate becomes high), so they get the incentive to lend.