Suppose a bank is faced with two types of borrowers - a highriskborrower that should be charged an interest rate of 9% and a low riskborrower that should be charged an interest rate of 4%. Thereis a 30%chance of getting a high risk borrower and a 70% chance of getting alow risk one. What is the expected interest rate that will be chargedby a bank that cannot exactly distinguish between the two types butknows the probabilities of each type. In this market for loans whatwould be the result.
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