Collateral shocks:
A) force banks to hold more of their assets as cash.
B) typically shift employment from one industry to another.
C) force people to sell their homes.
D) slow the adjustment of the economy to business cycle fluctuations.

Question

Quizplus · Accepted Answer

Collateral shocks can disrupt the financial system and lead to a slowdown in the adjustment of the economy to business cycle fluctuations. As a result, businesses may have a harder time getting access to credit, which can slow down investment and hiring. While collateral shocks can cause people to sell their homes, this is not always the case, and it is not a necessary consequence of a collateral shock. Holding more assets as cash may be a prudent response for banks during times of uncertainty, but it is not a direct consequence of collateral shocks. Similarly, while collateral shocks can lead to shifts in employment from one industry to another, this is not always the case, and it is not a necessary consequence of a collateral shock.

Collateral Shocks