Question

How does the availability of credit impact the economy? What policies affect this & how?

Complete explanation please. Thank you!

Answer 1

Credit contributes to higher consumption, thereby rising economic income rates. This in turn leads to higher GDP (GDP) and therefore faster productivity growth. If credit is used to buy productive resources it contributes to economic growth and adds to income. Credit also leads to cycles of debt creation.

Credit contributes to higher consumption, thereby rising economic income rates. This in turn leads to higher GDP (GDP) and therefore faster productivity growth. If credit is used to buy productive resources it contributes to economic growth and adds to income. Credit also leads to cycles of debt creation. Banks in an economy are significantly impacted by credit production. This is because their primary activity is to offer loans in exchange for interest payments to customers. When an economic climate improves and consumers are more likely to spend, credit demand increases.

The debt cycle is the principal cause of the economic cycles. Credit and debt expansion leads to GDP (gross domestic product) expansion, thus leading to an expansionary cycle. Any credit crunch leads to recession.Positive economic growth, decreasing unemployment and rising inflation characterize the early expansionary cycle. This usually follows a recession, so it's a move from negative growth in GDP to positive growth in GDP. Backed by expansionary monetary policy and low interest rates, credit markets perceive liquidity as a beginning to increase demand for credit and consumer spending.

The use of the financial system to control aggregate demand ( AD) is credit policy / financial policy. Monetary policy affects AD, by regulating interest rates and money supply through the central bank. AD is affected by fiscal policy through the use of government spending and taxation.

Credit policy considers such factors as: Bank lending rates to business enterprises and households.
Delivering credit and making loans available from banks to firms and households.
In normal economic circumstances the Central Bank was felt able to adequately control the economy by changing base rates.