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Long Term Debt Cycle

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Questions and Answers

What do we call it when people borrow more money and appear more creditworthy?

Income rise

Debt cycle

Bubble (correct)

Debt burden

What happens when debt repayments start growing faster than incomes?

Forced to cut back on spending (correct)

People borrow more money

People feel wealthy

Asset values increase

How do rising incomes and asset values impact borrowers' creditworthiness?

Decrease creditworthiness

No effect on creditworthiness

Cause bankruptcy

Improve creditworthiness (correct)

What is the outcome when debt burdens slowly increase over decades?

Increase in debt repayments Signup and view all the answers

Why do lenders extend credit more freely despite people becoming more indebted?

Because of the belief that things are going well Signup and view all the answers

What effect does borrowing huge amounts to buy assets as investments have on asset prices?

Results in higher prices Signup and view all the answers

Why does borrowing decrease during a deleveraging period?

Borrowers become less creditworthy. Signup and view all the answers

What happens to asset prices during a deleveraging?

Asset prices drop. Signup and view all the answers

Why is lowering interest rates ineffective during a deleveraging compared to a recession?

Borrowers do not want to borrow anymore. Signup and view all the answers

What is the primary reason for the difference between a recession and a deleveraging?

Debt burdens becoming too large in a deleveraging. Signup and view all the answers

What contributes to the vicious cycle during a deleveraging period?

Less borrowing leading to less income. Signup and view all the answers

How do borrowers react when they feel crippled by debt during a deleveraging?

They stop borrowing money completely. Signup and view all the answers