During a credit crunch
A)banks typically lower interest rates to attract new borrowers.
B)small-business investment increases relative to large-business investment.
C)banks typically hold much smaller portions of their portfolios in loans.
D)housing investment increases relative to large-business investment.

Question

Quizplus · Accepted Answer

During a credit crunch, banks become more cautious about lending and may hold smaller portions of their portfolios in loans to reduce their risk. This can further exacerbate the credit crunch as it reduces the availability of credit in the market. Lowering interest rates (option A) may not necessarily be the case as banks may also need to increase their rates to account for the higher risk they are taking on. Small-business investment increasing (option B) and housing investment increasing (option D) are also not guaranteed outcomes during a credit crunch as both types of investments may also face difficulty accessing credit.

During a Credit Crunch