Supply factors and interest rates

What is the link between a credit crunch where the supply of commerical loans (say commercial money market instruments) reduces and an increasing short term interest rate? ie why does the credit crunch result in the interest rate going up instead of down?

 

Hello Tatos,

Let me have a go at it.

When there is credit crunch, and as you said, supply of commercial loans reduce, it effectively means that suppliers of such commercial loans are generally unwilling to lend money due to some reasons. If lending and commercial activities are to continue, a rise in interest rates can be anticipated as the consumers of such loans would be willing to pay more to borrow the money.

Oh, i forgot to add that phrase i was taught in high school.."all else being equal"

 

Cool, thanks again Jollyfakey! Makes sense!