Question

In the context of this chapter, identify what each of the following scenarios has in common and explain how they will affect an economy suffering from a recession.

1. Joe and Julie married, saved, and bought a modest home several years ago when housing prices were rising. They love their home and its location, are now expecting their second child, and need more space. Financially, they can afford a larger house payment, or a second mortgage, but their bank has informed them that despite their significant down payment, they are ineligible for a home equity loan because the current value of their home has declined to below the balance on their mortgage.
2. A bank has many potential borrowers with good prospects but due to problems with previous real estate loans, it has begun to build up its excess reserves in order to strengthen its balance sheets in the event of defaults on those assets.
3. A car dealership finds itself in the path of a tornado that destroys all of its stock of both used and new cars. Sales have been good because the recession has mostly spared this region of the country, but the dealership’s insurance does not cover weather-related events and the dealer now has no assets and a negative net worth.

Answer 1

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