Question

Sometimes in order to stimulate more consumer spending, the federal government will compel banks to relax lending standards for a time to entice more people and more business organizations to take out more loans than they would normally do under more restrictive standards.

Is the relaxing of lending standards a wise policy to implement from time-to-time, or is the risk to the overall economy too great to make use of such a policy? Explain in detail why or why not, and also keep in mind that such a relaxed standards policy played a significant role in the economic troubles the country endured primarily in 2007-2008.

Answer 1

This is known as the monertary policy of the government.

This policy has its benefits due to

a. stimulating people to borrow more,

b. spend more,

c. save less,

d. increase aggregate demand, and thus the GDP and stimlate the economy.

yet this policy has certain issues as sometimes over spending might occur, where consumers consistently increase the level of demand, affecting the rate of inflation in the economy, giving rise to demand pull inflation. In worst situations, if the inflation rate cannot be control, it will lead to a staggering fall in the value of the currecy, disrupting the entire economy.

Thus while it cannot be conclusively concluded, it remains true that this policy is extremely essenttial to pump and boost the economy, which was one of the policies used to recover from the great depression in 2008. Having a close regulation and monitering may play an effective role in preveting the drawbacks of this policy such as staggering rate of inflation in the economy