By borrowing constraints, one refers to the inability to borrow funds from banks or other financial institutions, In such a scenario, the most adversely affected group is the lower-middle-income and poor households and firms. This is because the upper-middle-income or the rich sections have chunks of savings which they have reserved for a rainy day like this. The borrowing constraints in an economy cause the affected group to refrain from consuming their needs and it prevents small firms from indulging in private investment. As a result, there is a decrease in two major components of GDP ( consumption (C) and Private Investment (I) ) leading to inefficiencies in the economy.
In such a situation, the method suggested above, i.e. to distribute resources from wealthy households and firms to poor households and firms can prove to be effective to bring some stability within the economy. This redistribution will help the affected segment receive necessary resources for consumption and business activities, while it will have little or no effect on the un-affected segment. This will stabilize consumption and private investment from the affected segment and not cause much hindrance to the un-affected segment. Hence, restoring balance in the economy.