Ch 10 - Credit

Question 1

State 2 purposes credit serves

Answer 1

1. helps businesses to finance fixed start up costs or adopt new technologies
2. helps to get working capital
3. smoothing income shocks

Question 2

In a world with perfect capital markets, we expect the (risk adjusted) _________ to be equalised across all activties

Answer 2

marginal cost of capital

Question 3

Money lenders tend to charger ________ int rates than formal banks

Answer 3

higher

Question 4

What are some limits of the credit market?

Answer 4

Information asymmetries—– moral hazard
Adverse selection
Need for collateral
Strategic default

Question 5

Why are lending rates high in informal markets?

Answer 5

To cover for the cost of deposits and the higher risk of default

Question 6

What is the average profit margin on each loan?

Answer 6

(1-d)(1+i) - (1+p)

Question 7

Borrows choose to repay if the net profit with repayment is _______ than the net profit without repayment

Answer 7

Larger

Question 8

Individuals with larger wealth and higher evasion costs get ____ loans

Answer 8

Larger

Question 9

The size of the loan also _______ in int rate because the benefits of avoiding repayment increases

Answer 9

Decreases

Question 10

State 2 problems with subsidised credit

Answer 10

1. funds may be diverted to unintended recipients with political connections
2. high default rates

Question 11

What is microfinance?

Answer 11

Small loans/ funds to individuals unable to access formal channels of credit

Question 12

Instead of collateral, microfinance institutions use _____________ to promote repayment

Answer 12

Exclusion from future credit, group lending/ joint liability