A credit crunch reduces aggregate demand by:
A) increasing the exchange rate.
B) increasing interest rates.
C) reducing consumption and investment spending.
D) reducing the money supply.

Question

Quizplus · Accepted Answer

A credit crunch reduces the availability of credit, making it more difficult and expensive for consumers and businesses to borrow money. As a result, consumption and investment spending are reduced, which in turn leads to a decrease in aggregate demand. Option A is incorrect as increasing the exchange rate may actually increase aggregate demand if it leads to a decrease in the price of imports. Option B is not the best choice as increasing interest rates would also decrease aggregate demand, but it is not a direct consequence of a credit crunch. Option D is also not the best choice as reducing the money supply may lead to a decrease in aggregate demand, but it is not a direct consequence of a credit crunch.

A Credit Crunch Reduces Aggregate Demand By