What is the relationship between tighter credit conditions and economic performance?

The relationship between tighter credit conditions and economic performance is characterized by the potential for economic slowdown. When credit conditions are tight, borrowing becomes more difficult and expensive for both consumers and businesses. This often results in reduced consumer spending, as individuals may find it challenging to secure loans for major purchases, such as homes or cars. Simultaneously, businesses may postpone or scale down investments in expansion, inventory, or new projects due to the higher cost and lower availability of financing.

As a consequence, the overall demand within the economy can decrease, leading to slower growth or even contraction. Tighter credit conditions can also increase the risk of default for overstretched consumers and businesses, further exacerbating the economic slowdown. Thus, the correct answer highlights the negative correlation between tight credit and economic performance, emphasizing how a restricted lending environment can lead to reduced economic activity.