What does the simple numerical exercise reveal

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Question: Suppose you live in a low-income community, and that the government wants to help you by granting you the right to borrow $120 at a subsidized annual interest rate of 6 percent. Explain which of the following two strategies you would choose and why: (i) invest the $120 in your family business to obtain an annual net return of 15 percent while incurring a cost of $16, or (ii) deposit the money in a local commercial bank with an annual interest rate of 2.5 percent. What does this simple numerical exercise reveal about the design of government interventions to assist poor individuals' businesses?

Reference no: EM132174581

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