A credit crunch occurs when loans are very expensive and difficult to obtain.
How it works (Example):
During a credit crunch, lending institutions are limited as to the amount of funds they can use to make loans. Lenders are afraid borrowers willdefault, and interest rates increase as a way to compensate lenders for this increase in risk.
Why it Matters:
A credit crunch is very undesirable because it can hinder economic recovery and even protract a recession. If business and individuals are unable to get credit just as economic expansion would otherwise take place, the recovery that would otherwise take place will be choked off or even reverse.
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