Everything else remaining unchanged, what is likely to happen to the credit demand curve of an...

Everything else remaining unchanged, what is likely to happen to the credit demand curve of an economy if:

(a) businesses in the economy see scope for growth and are planning to expand production in the future?

(b) households are pessimistic about future incomes?

Explain

Solutions

Expert Solution

a) If the business in the economy is seeing better future they will try to expand their investment and they will take more credit. It will shift the credit demand curve to the right and the quantity of credit demanded in the economy will increase and the interest rate too.

b) If the household is pessimistic about the future they will spend less and save more. Due to decreased demand in the economy and subdued consumption business activity will be less and business and the individual will demand less credit. This will shift the credit demand curve to the left at a lower interest rate and lower quantity of credit in the market.

c) Government borrowing will increase the demand for credit in the economy as the government itself will be demanding a high amount of loans. this will cause a movement along the credit curve and shift the interest rates up and at higher rates demand for credit will be less i.e. individuals and business houses will be getting less credit. We also call it as crowding out effect.

Rahul Sunny answered 1 year ago

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