A credit crunch causes a recession because:
A)potential borrowers can't get loans or must pay very high interest rates, so they cut back on spending.
B)banks have a surplus of funds to loan, so interest rates fall to very low levels.
C)unemployment falls to very low levels, causing a problem of inflation.
D)interest rates are so low that investors' incomes fall, and they decrease their spending.

Question

Quizplus · Accepted Answer

A credit crunch leads to a decrease in the availability of credit, or an increase in the cost of credit, which makes it difficult for potential borrowers to get loans or only can receive loans at very high interest rates. The reduced availability or increased cost of credit causes consumers to cut back on spending, which results in a decrease in demand and output, leading to a recession.

A Credit Crunch Causes a Recession Because