Final answer:
Usury laws set a maximum interest rate lenders can charge, but if set above market rates, they have minimal impact unless market conditions change.
A price ceiling becomes effective when market rates exceed the set limit, possibly leading to reduced loan availability.
Step-by-step explanation:
Laws that ban changing interest rates or set a maximum interest rate are known as usury laws. These laws have been established to prevent lenders from charging excessively high-interest rates. While usury laws set caps on interest rates, such as a limit of 35% per year, they often set these caps above market interest rates.
Therefore, the impact of usury laws on the amount of loans made and interest rates paid would be minimal as long as market forces keep rates below the set ceiling.
Only when market rates approach or exceed the cap would these laws potentially reduce the number of high-interest loans made, as lenders may not offer loans where the interest rate is capped below what they consider compensatory for the risk involved.
Example of a Non-binding Price Ceiling
A price ceiling set above the current market equilibrium interest rate is considered non-binding, which means it does not affect the current operation of the market. This price ceiling would only become effective if market conditions cause interest rates to soar above the set limit.
In such a scenario, lenders might limit the number of loans they make or demand higher collateral to offset the capped interest earnings.