Multiple choice

As we read in financial news-papers and economic journals/ magazines in financial sector a time comes when the banks cannot lend more; in fact they start recalling their old loans and also raise the rate of interest. What message does it give to the business community?

  1. This creates an atmosphere where corporates impatiently start reducing their inventory holdings and cancel the unexecuted orders pending with the manufacturers.
  2. Manufacturers start curtailing their scale of operations and start turning workers out of employment.
  3. Workers also start curtailing their spending and the demand of the commodities goods/services get reduced as people buy less.

  1. Only 1

  2. Only 2

  3. Only 3

  4. 1 and 3 only
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

When banks recall loans and raise interest rates, it signals a credit crunch. This forces businesses to reduce inventory and cancel orders (1), and leads to reduced consumer spending due to job losses (3). Statement 2 is a consequence, but the question asks for the message to the business community, which is best captured by the economic cycle described in 1 and 3.

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