Someone was saying: "Why is credit so important? Because when a borrower receives credit (loan), he's able to increase spending. Spending drives the economy. This is because one person's spending is another person's income ".

I think he didn't look at the lender's prospective. When a lender gives his money to someone else, his spending will decrease. So the economy is balanced and this will not drive the economy. The same amount is spent just by a different person.

Am I right? What am I missing?


1 Answer 1


The lender is typically supplying loanable funds in the form of ‘savings’. I.e. money she wouldn’t spend until a future date. But the market for loanable funds allows one to earn interest on these savings rather than laying dormant (think about when people would store money under their mattresses). So, with this surplus of funds, another can make use of these funds (for a price, interest) and increase the amount of spending they themselves do. Hence, the total amount of spending would increase because if that person hadn’t borrowed money to increase their spending, the money would sit in savings.


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.