During a recession,lending typically declines because:
A) banks need to hold less as a cushion for themselves.
B) asset prices fall and therefore the net worth of firms declines as well,making them look riskier to banks.
C) there are fewer collateral shocks.
D) there is more demand for investment funding.

Question

Quizplus · Accepted Answer

During a recession, asset prices tend to fall, which leads to a decline in the net worth of firms, making them appear riskier to banks. As a result, lending typically declines. Choice A is incorrect because during a recession, banks usually hold more cushion as a precautionary measure. Choice C is incorrect because during a recession, collateral shocks may increase, which can further impact lending negatively. Choice D is incorrect because during a recession, demand for investment funding usually declines.

During a Recession,lending Typically Declines Because