What was the role of private credit (car loans, credit cards) in causing the problem of underconsumption?

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Question restatement: What was the role of private credit (car loans, credit cards) in causing the problem of underconsumption?
Option 1: 'Loans were mainly short-term, meaning that you prioritized paying loans over consuming products.' While short-term loans can affect spending priorities, this choice frames private credit as primarily delaying consumption by forcing loan repayment, which does not directly explain how private credit caused underconsumption on a macro scale. In fact, short-term borrowing often supports current spending rather than explaining a systemic shortfall in aggregate demand.
Option 2: '' (an empty option). This option provides no content to evaluate, so there is nothing to analyze or link to the question. In a real exam, this would be considered an invalid choice due to missing information.
Option 3: 'Growth of private credit meant that people bought everything they could ever want, leading to a drop in consumption thereafter.' This suggests an immediate surge in consumption followed by a later drop, but underconsumption is about insufficient current demand rather than a post-hoc decline after saturated demand. Private credit typically expands current consumption, not by causing an eventual persistent drop in consumption as a direct result of prior borrowing.
Option 4: 'The increase in private credit had an offsetting effect of consumption declines, as people could buy more things even as the economy was getting worse.' This option describes a mechanism where easier access to credit temporarily sustains or expands consumption despite a weakening economy, thereby offsetting some the declines that would otherwise worsen underconsumption. In macro terms, credit expansion can prop up demand in the short run, delaying or mitigating the drop in consumption that characterizes an underconsumption problem.
In summary, option 4 provides the most accurate depiction: private credit tends to support current spending and can offset declines in consumption during deteriorating economic conditions, whereas the other options either mischaracterize the timing, effects, or imply an outcome not aligned with typical underconsumption dynamics. The empty option 2 cannot be assessed and offers no explanatory value, so it does not provide a plausible answer.

ECON 5470-001 Spring 2025 Quiz 5

What was the role of private credit (car loans, credit cards) in causing the problem of underconsumption?

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