The Great Recession was characterized by a collapse in housing prices, and a subsequent crunch in credit. Begin with the market for bank loans in equilibrium. A credit crunch occurs when the supply of bank loans contract leading to higher interest rates on bank loans. As interest rates on bank loans increase, what happens to durable consumption and planned investment, and why? These changes alter the Keynesian PAE model.
The Great Recession was characterized by a collapse in housing prices, and a subsequent crunch in credit. Begin with the market for bank loans in equilibrium. A credit crunch occurs when the supply of bank loans contract leading to higher interest rates on bank loans. As interest rates on bank loans increase, what happens to durable consumption and planned investment, and why? These changes alter the Keynesian PAE model.
When there exists a lack of supply of bank loans which increases the interest rates on bank loans, the impact is on the consumption level as well as the investments of the people.
When the economy has a lot of money in the hands of the people which creates an inflationary gap in the economy, to curb that gap, the central government raises the interest rates on loans so that the supply of money in the market and money in the hands of people can be reduced.
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