Bankruptcy risk plays a role in the propagation of recessions by:
A)causing a backlog in the caseloads of bankruptcy courts.
B)causing firms to increase capital expenditures as the economy begins to slow.
C)forcing firms to pay down debt.
D)straining the liquidity positions of both individuals and firms, both of which try to avoid bankruptcy by maintaining liquidity.

Question

Quizplus · Accepted Answer

Bankruptcy risk leads to a strain on the liquidity positions of both individuals and firms as they attempt to maintain enough liquidity to avoid bankruptcy, especially during economic downturns. This can exacerbate the effects of a recession by reducing spending and investment.

Bankruptcy Risk Plays a Role in the Propagation of Recessions