Question

A credit crunch can occur in periods:
A) when a stimulative monetary policy is implemented.
B) when a restrictive monetary policy is implemented.
C) when both of these occur.
D) when neither of these occur.

Answer 1

@mos3bq What is a credit crunch?

Answer 2

A credit crunch occurs when it becomes difficult to borrow money and take loans. This can occur because the government is engaging in restrictive monetary policy. When restrictive monetary policy is used, they remove cash from the money supply increasing interest rates.

Answer 3

A credit crunch (also known as a credit squeeze or credit crisis) is a reduction in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from the banks. A credit crunch generally involves a reduction in the availability of credit independent of a rise in official interest rates. In such situations, the relationship between credit availability and interest rates has implicitly changed, such that either credit becomes less available at any given official interest rate, or there ceases to be a clear relationship between interest rates and credit availability (i.e. credit rationing occurs). Many times, a credit crunch is accompanied by a flight to quality by lenders and investors, as they seek less risky investments (often at the expense of small to medium size enterprises).[1]