Collateral shocks tend to amplify business cycles because:
A) assets are typically worth more in booms than in recessions and the value of assets tends to be positively correlated to firms' ability to obtain investment funding.
B) the returns to work are higher in booms than in recessions,so people work more during booms and less during recessions.
C) the returns to investment are higher when others are investing as well;thus we see more investment during booms and less during recessions.
D) the uncertainty of recessions tends to increase people's job search time,while greater certainty decreases search time during booms.

Question

Quizplus · Accepted Answer

Collateral shocks, such as a drop in the value of assets, can reduce firms' ability to obtain investment funding, which can further depress economic activity. This amplification effect is stronger when assets are worth more in booms than in recessions, as firms' ability to obtain investment funding is positively correlated with the value of assets.

Collateral Shocks Tend to Amplify Business Cycles Because