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In post-2007-08 great recession, banks were reluctant to issue new loans, recalled existing loans, and closed...

In post-2007-08 great recession, banks were reluctant to issue new loans, recalled existing loans, and closed lines of credits to businesses. What was the effect of those policies on the economy? Using an AD-AS model demonstrate.

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When banks stopped issuing loans and closed line of credits to the business, it negatively affected aggregate demand as consumption spending was discouraged as well as investment spending also came down by the firms to discourage the supply. It caused the decreased in aggregate demand as well as decrease in aggregate supply. Further, there was chained action of negative activities. Decrease in demand, caused a decrease in supply and unemployment increased. It further contributed to the decrease in aggregate demand and aggregate supply further came down. So, the economy went into the recession.

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