How Does Credit Crunch Affect Economy?

How Does Credit Crunch Affect Economy?
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  1. As the definition suggests that a credit crunch implies lack of borrowing which would further imply that borrowers won’t get loans easily and due to this scarcity, interest rate would increase. This is no good for economy as an increase in interest rate would decrease the money supply, hence creating a recessionary period. Obviously increase in interest rate is not the lone factor for it, many other things like fall in house prices, fall in investment, fall in consumer spending, increase in government borrowing etc. would lead to recession. When hit with a recession, a credit crunch will often lead to many corporate bankruptcies. This increases the crunch’s economic impact by stifling the economy’s ability to recover.

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