MCQ for Economics June 2007 Paper 1 Question 7

[arvind0708]

7 A businessman had intended to borrow $5000 at 8 % per year for house purchase. When the
interest rate rose to 10 % he decided to borrow only $4000.
Within what range is his interest elasticity of demand for loans?
A 0.0 to –0.3
B –0.4 to –0.7
C –0.8 to –1.2
D –1.3 to –1.7

What calculation should be done to get the answer.

 

[Xenon]

The calculation is same as calculating the PED. Here u will have to replace the demand for goods with the demand for the borrowing amount and the price with the interest rate. This gives: % change in borrowed amount/ % in interest rate. The final value is -0.8.

Ans: C