economics Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analyzes ...

, a liquidity constraint is a form of imperfection in the capital market which imposes a limit on the amount an individual can borrow, or an alteration in the

interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, ...

they pay. By raising the cost of borrowing or restricting the amount of borrowing, it prevents individuals from fully optimising their behaviour over time as studied by theories of intertemporal consumption. The liquidity constraint affects the ability of households to transfer resources across time periods, as well as across uncertain states of nature, relative to income.

Mortgage A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any ...

lending is the cheapest way of an individual borrowing money, but is only available to people with enough savings to buy property. Because the loan is secured on a house or other property, it is only accessible to particular individuals (those who have enough savings to put down a down payment). Other forms of credit, like unsecured loans,

credit card A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder's accrued debt (i.e., promise to the card issuer to pay them for the amounts plus the o ...

s and

loan shark A loan shark is a person who offers loans at extremely high interest rates, has strict terms of collection upon failure, and generally operates outside the law. Description Because loan sharks operate mostly illegally, they cannot reasonably ...

s, have progressively higher interest rates, and are used more by poorer people.

References

{{econ-stub Intertemporal economics