Question

Q24. Consider the following statements about Credit Crunch:

1. An economic situation where banks and other financial institutions become extremely reluctant to provide loans to businesses.

2. An economic crisis where countries are not able to get funding from World Bank.

3. It also known as credit squeeze.

Which of the above statements are correct?

• A. a) 1 and 2 only
• B. b) 1 and 3 only
• C. c) 2 and 3 only
• D. d) All of the above

Answer 1

The correct option is B

b) 1 and 3 only

Credit Crunch

• Also known as a credit squeeze, this refers to an economic situation where banks and other financial institutions become extremely reluctant to provide loans to businesses.
• This could be the result of banks suffering huge losses on their portfolio, which makes them adopt a cautious approach to protect their equity.
• It could also happen when banks begin to doubt the repayment capability of their customers amidst a general gloom in the overall economy.
• As bank credit is a major source of money creation in most economies, a credit crunch can also cause a general fall in prices across the economy like after the global financial crisis of 2008