Consumer Borrowing Term Paper

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Consumer Borrowing -- Spending an Economy Out of a Recession

The 'answer' provided by consumer borrowing and spending during recessions and even depressions revolves around the classical, microeconomics 'answer' to what seems like an economics paradox. Namely, how does one stimulate the economy into a state of recovery, when one is faced with consumers who have less money to spend on basic goods? Consumers who may be unemployed are understandably cautions about their economic future, so how does one 'give' them money to spend and encourage producers to produce.

Neo-classical or naturalistic theories of economics have tended to stress the need for the Federal Reserve Bank to lower the interest rate. This makes it cheaper for consumers to borrow money from banks, less punitive for consumers to use their credit cards to make purchases with money they do not have at the moment, and it also gives consumers an incentive to purchase large, durable goods like appliances and automobiles. The expected rational of lowering interest rates is that consumers would have to take out loans to buy such goods anyway, so why not take out a loan when the rate of borrowing or interest is low?

Also, as the economy worsens, quite often people head back to school to increase their employable skills, presumably to take refuge from a hostile job market.

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Thus, making educational loans more available is a good idea during times of economic recession, as this results in students possessing more money to finance their education, and to survive times of economic limitations during their studies and also in terms of a recession-gripped economy as a whole.

Keynesian economic theory often takes more of a 'macro' view of economic downturns. It suggests that when times are bad, even if interest rates are low, often people are still too fearful to spend money. During a recession, people want to hoard money, causing the economy to constrict still further. This results in still more layoffs and economic limitations, as factories close and more workers are laid off -- workers with less ready money to spend, and less willingness to make use of available credit. Thus, the federal government under such an analysis, ought to employ more workers, spend to a deficit, and….....

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