The riskiness of banks assets fluctuates over time. For example, default risk on loans rises and falls.
Question:
a. How are banks likely to adjust their equity ratios (their ratios of capital to assets) when the riskiness of assets changes? Explain.
b. How do the adjustments in part (a) affect the sizes of booms and recessions? Explain.
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a When assets become more risky it is more likely that banks will have to write off assets This can ...View the full answer
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