The Effect of Bank Lending on the Economy. In conducting expansionary monetary policy, even if the Federal Reserve Bank is providing reserves to the banking system, during a recession or during periods of slow economic growth, banks may choose not to lend out their reserves when interest rates are low and potential borrowers look risky. This is known as a “credit crunch”. Explain how a credit crunch affects economic growth. Specifically, answer these questions in your post:
How does a credit crunch affect consumer spending and business investment?
How does a credit crunch affect aggregate demand, GDP, and unemployment?
Reference: Chapter 14.1 Is Monetary Policy Effective? and section 14.3: Domestic Sectoral Effects.
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