An increase in commercial bank lending may or may not increase economic growth, depending on various factors. Here are some reasons why it might or might not increase economic growth:
Firstly, an increase in bank lending can lead to households and firms spending more on goods and services, increasing total demand, and potentially increasing output. This can result in higher economic growth, as higher demand can lead to increased production and higher employment.
Secondly, an increase in lending can also lead to firms investing more, leading to higher employment and increased productive capacity. This can also increase total demand and output and lead to higher economic growth.
Thirdly, higher investment can increase total demand and productive capacity, leading to higher economic growth. Firms can invest in new projects, expanding their operations, and improving their productivity, which can lead to higher output levels.
However, an increase in commercial bank lending may not always lead to economic growth. For example, if the economy is already at full employment, then an increase in demand may lead to higher prices rather than increased output. This can lead to inflation, which can negatively impact economic growth.
Furthermore, households and firms may use the funds borrowed to repay past debts, rather than spending on goods and services, which would not lead to an increase in total demand and economic growth.
Lastly, an increase in variable interest rates could affect the level of future consumption and investment, reducing total demand and economic growth.
In conclusion, an increase in commercial bank lending may or may not lead to increased economic growth, depending on various factors such as the state of the economy, the use of the borrowed funds, and interest rates.