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Market clearing device in rural credit markets

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Reference no: EM131299170

Suppose that the typical moneylender has 10,000 pesos to lend out to farmers in the village and the opportunity cost of his funds (what the lender can get if he puts his funds in the bank) is 10 % per annum.

1. What will be the minimum interest rate that will be charged to farmers in the village if the probability of repayment is 100%? (Hint: calculate the moneylender's expected profits from making the loan.)

2. How does your answer to A) change if the probability of repayment falls to 60%?

3. In the context of this application, explain why interest rates are often not used as a market clearing device in rural credit markets.

Reference no: EM131299170

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