Economics
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Question from Past Microeconomics Qualifying Exam[]

Fall 2000 - Section I, Question two, George Mason University

True, False, Uncertain. Determine whether or not each of the following statements are true or false. Explain your reasoning briefly in a paragraph or two. (The explanation is often more important than the answer given). Include a carefully labeled diagram or game matrix if it helps to clarify your answer.


Laws permitting bankruptcy make borrowers better off.

Answer[]

Uncertain. While strictly speaking, borrowers are better off because it can prevent the bank from collecting more than they otherwise would, banks are also less likely to lend. Bankruptcy laws lower a bank's capacity to recover from defaults, making them less likely to loan to high-risk/high-payoff clients and more likely to loan to low risk/low payoff clients. Particularly favorable bankruptcy laws can result in many potential borrowers being denied funds, even if they are likely to pay back the debt.

Other Questions[]

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