Final answer:
The Sports Store's line of credit involves a substantial compensating balance and quarterly interest, while the broader credit card market sees high average annual interest rates and billions paid in interest and fees by Americans annually.
Step-by-step explanation:
The provided scenario involves the Sports Store having a $230,000 line of credit that requires 15 percent of the unused portion of the credit line to be held in a non-interest bearing account as a compensating balance. The interest rate on the borrowed funds is 2.05 percent per quarter. To calculate the effective annual interest rate, we'd take into account the interest paid on the utilized credit line and the opportunity cost of the compensating balance that does not earn any interest. However, exact calculations for the effective annual rate aren't provided in the context of the question.
Comparing this to the market for borrowing with credit cards, we can see that credit card interest rates range from 12 to 18 percent per year, and in 2021, almost 200 million Americans were cardholders with about $807 billion in outstanding credit card debt. This scenario showcases the significant costs associated with credit card borrowing, as families end up paying tens of billions of dollars annually in interest, plus fees for basic card maintenance or late payments.
If the interest rate in the market is below the equilibrium, such as 13%, leading to a higher demand than the supply, credit card firms are likely to increase interest rates or fees until equilibrium is reached. This is all part of the underlying economics of how the credit market adjusts to imbalances between supply and demand.