Chapter 10, Problem 1QFT

To determine

Concept Introduction:

Market Inefficiency: It is a situation in which there is lack of information between buyers or sellers.

In case of loanable fund market, inefficiency generally means that the market price does not highlight the information regarding demand and supply correctly.

The borrower faces constraint to get loans from the bank because bank has certain criteria for providing loans. On the other hand banks lack information about the credibility of the borrower.

G Bank: The main function of the bank is to provide loans to the poor people without any legal obligations and collateral security. It also takes responsibility of a borrower if one gets into any difficulty.

Answer to Problem 1QFT

The inefficiency that G bank has exploited is accessibility of loans, loan repayment default, and borrowing constraint. The major source of inefficiency is the borrowing constraint.

Explanation of Solution

Inefficiency Exploited by G Bank

There is much inefficiency that G bank has exploited. Some of them are:

• It ensures that the loans taken by the group members are repaid without any legal obligations and credit history of the person.

• It also takes financial responsibility of the person who borrows from such banks and gets into some difficult situation.

• If all the members repay the loan at the right time then they are offered a large amount of the loan.

• It provides loans not on the basis of the current price rather than the amount of the repaid loan by its member.

Source of Inefficiency:

• The major source of inefficiency in such markets is the lack of communication between borrowers and lenders.

• It is because the needs of borrowers are not fulfilled by the bank due to the borrowing constraints like collateral assets and credit history.