Question

Countries experience a “credit crunch” when banks reduce lending due to a decline in the dollar value of their reserves.
Identify two different techniques the Bank of Canada can use to reverse a credit crunch in Canada.
what subsequent action by the banks might frustate the central bank's objective to avoid the credit crunch?

Answer 1

Answer : Credit crunch can be reversed using g the following two techniques:

Tight credit policy: One of the reason of credit crunch is loose credit policy, thus, tightening the credit policy will help to reverse the credit crunch.

Valuation of assets: The loose credit policy is of the reason of credit crunch, If loaned funds are easily available the borrower demand more securities/assets to buy which increase/inflate the price assets/securities. By revaluation of assets the market price of assets gets stabled and they will reach at equilibrium where the demand of assets/securities decreases and help in reversing the credit crunch.