Skip to main content

🎓 New resources added daily! Join over 50,000 students using Padandas

What are the causes for interest rate differentials?

What are the causes for interest rate differentials?

Solution

Interest rates vary across borrowers and places, and the causes of such differentials are:

  1. Difference in gross interest: more risk, inconvenience and loan-management cost lead to a higher rate.
  2. Nature of security: liquid collateral (e.g. gold) carries a lower rate than illiquid security (land, houses).
  3. Period of loan: long-term loans carry higher rates because money is locked up longer.
  4. Amount of loan and distance: larger loans tend to carry lower rates, and lenders charge more over greater distances, along with differences from market imperfections.

Explore more questions

  1. 1.

    Consider the following table:

    Points: A B C D E
    Px: 8 6 4 2 0
    Qsx: 50 40 30 20 10
    Qdx: 0 15 30 45 60

    a. Derive linear demand and supply functions.
    b. Graph Qsx and Qdx and determine equilibrium price and quantity.
    c. Compute price elasticity of supply at movement from B to D and D to B by (i) percentage method and (ii) arc method. Which method is more appropriate and why?
    d. How do business firms use the concept of price elasticity of demand in business decision making? Explain.

    Long question Asked in 2078 (15 marks)
  2. 2.

    State the characteristics of monopolistic competition. How are the price and the output determined under it in short-run? In what respects, monopolistic competition differ from perfect competition?

    Asked in 2078 (15 marks)
  3. 3.

    What is price effect? How can it be decomposed into income effect and substitution effect?

    Asked in 2078 (15 marks)
  4. 4.

    Consider the following cost schedule:

    Q: 0 1 2 3 4 5 6 7 8 9
    TVC: 0 20 36 48 64 100 160 248 360 520

    a. Compute TC, AFC, AVC, AC and MC at TFC = Rs. 200.
    b. Graph AC and MC and describe their relationship.

    Asked in 2078 (10 marks)
  5. 5.

    What are the motives of demand for money according to Keynes? Explain.

    Asked in 2078 (10 marks)
  6. 6.

    Explain the concept of incremental cost pricing with suitable examples.

    Asked in 2078 (10 marks)