In the long run, credit crunches:
A)have no lasting economic effects.
B)are offset by periods of credit ease.
C)improve the allocation of national saving, improving potential output.
D)misallocate national saving, reducing potential output.

Question

Quizplus · Accepted Answer

Credit crunches misallocate national saving by reducing the availability of credit, which in turn reduces investment and consumption. This reduction in economic activity decreases potential output, which has lasting economic effects. While periods of credit ease may offset the immediate impact of a credit crunch, the long-term effects still persist. Therefore, option D is the best choice.

In the Long Run, Credit Crunches