Credit Crunch

Credit crunch results due to sudden decrease in the availability of liquidity in the financial market causing a sudden appreciation in the cost of obtaining a loan from financial institutions. The liquidity in the financial market includes loans or credit. A worldwide credit crunch resulted due to high level of indebtedness, overleveraging of financial institutions and the interconnected global market. This contributed to worldwide economic slowdown (Hynson, 2010).

Consequently, credit crunch lowers consumer confidence, that is, the public attitude towards the general economic outlook and personal spending. This is important in predicting business investment decisions and consumer spending (Turner, 2008). Therefore, the existence of credit crunch is likely to make consumer confidence and spending to remain subdued.

Aggregate demand is the total demand or spending on final goods and services in an economy at a given price level and time period. Credit crunch will lead to a cut on government spending so as to struggle, and balance demand for public services and goods with reduced tax receipts due to tax increases that stifle the economy impacting on consume confidence.

GDP is the measure of an economy that involves the total market values of goods and services produced by employees and equity within a nation borders during a given period, usually one year. Credit crunch will cause public sector bodies suffer as stocks and shares will be falling (Murphy, 2009). The labour market will loosen resulting to a huge labour pool and more people tarmacking. The economy would experience slow return to economic growth and financial volatility coupled with high stock markets.

Finally, credit crunch results into further increases in overall unemployment since the jobs are lost in the public sector. This would lead to increased competition for jobs, high levels of poverty, larger number of school leavers leaving in difficulty just to mention a few. Therefore, credit crunch affects the four mentioned negatively.