Macro effect of a Loan

When money is loaned out it is eventually put back into another bank and is ready to be loaned out again. The effect of a loan in the economy is described through the equation, 1/ R (“R” is the reserve ratio) multiplied by the money supply ((1/R) x MS). Therefore, even these micro-loans have a greater effect on the economy. Although these loans are small, the do have a significant impact on the national economy as their positive effects ripple throughout, income, employment, aggregate supply, GDP and living standards.
The only way for a country to expand its output in the long run is for it to expand its aggregate supply. Aggregate supply is accounted for by, natural resources, labor, technology, capital and education. If any one of these factors is increased, overall output and therefore GDP can be increased. Micro-loans can help to increase many of these five factors within aggregate supply. Giving the unemployed poor an opportunity to take part in the economy is a great step in itself. This increases the amount of labor available in a country shifting the AS curve outward. With loaned money, capital resources can be increased as the poor buy materials to begin their own businesses. Many of these businesses need other laborers, who will be taught a new skill. These increases in capital, education and labor productivity also shift the AS curve outward. The potential output of the country is increased by this shift in aggregate supply. Micro-loans help to utilize those previously unused resources in a country such as the unemployed poor and force them to effect the economy in a positive manner.

When offered credit, the poor are often able to employ themselves and raise not only their own incomes, but the GDP of their country as well. Micro-loans also increase the aggregate supply of a country, ultimately increasing the countries production potential. Most importantly, micro-loans help the poor to improve their own lives and increase their dangerous living standards. Through its provision of credit, micro-finance empowers the poor, alleviating the strongest symptoms of poverty and helping stagnant countries to prosper.