Chapter 8, Problem 21Q

To determine

Gustavo is a young doctor who lives in a country with a relatively inefficient legal and financial system. When Gustavo applied for a mortgage, he found that banks usually required collateral for up to 300% of the amount of the loan. Explain why banks might require that much collateral in such a financial system. Comment on the consequences of such a system for economic growth.

Concept Introduction:

A well-functioning financial market is a market that promotes economic growth and keeps the economy stable. In order to make financial market to function well, an economy needs strict government authorities and strong legal systems so that people can honor the rules and laws of the market.