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Answer to Question #52692 in Other Economics for candy

Question #52692
4.)(a) What terms are used to describe the way a variable moves when economic activity is rising or falling?

(b) What terms are used to describe the timing of cyclical changes in economic variables? (see #31 multiple choice)

6.) The Krugman Book Question:

(a) Define what economists mean by term “leverage.”

(b) What role does leverage play in the theory of the business cycle elaborated by Hyman Minsky?

(c) What is a “Minsky Moment?”

(d) According to Minsky’s theory, is proper application of Fiscal Policy (Government Spending) or Central Bank Policy capable of stabilizing the financial sector (and the overall economy) so as to avoid future large-scale recession?
Expert's answer
4.)(a) Terms "procyclical" and "countercyclical" are used to describe the way a variable moves when economic activity is rising or falling.
(b) Terms "leading", "coincident" and "lagging" are used to describe the timing of cyclical changes in economic variables.
6.) The Krugman Book Question:
(a) Leverage is any technique to multiply gains and losses. Most often it involves buying more of an asset by using borrowed funds, with the belief that the income from the asset or asset price appreciation will be more than the cost of borrowing. Almost always this involves the risk that borrowing costs will be larger than the income from the asset or the value of the asset will fall, leading to incurred losses.
(b) Leverage helps both the investor and the firm to invest or operate. However, it comes with greater risk. If an investor uses leverage to make an investment and the investment moves against the investor, his or her loss is much greater than it would've been if the investment had not been leveraged - leverage magnifies both gains and losses. In the business world, a company can use leverage to try to generate shareholder wealth, but if it fails to do so, the interest expense and credit risk of default destroys shareholder value.
(c) The phrase "Minsky moment" was coined by Paul McCulley in 1998 while referring to the Asian Debt Crisis of 1997, in which speculators put increasing pressure on dollar-pegged Asian currencies until they eventually collapsed. These types of crises occur because investors take on additional risk during prosperous times or bull markets. The longer a bull market lasts, the more risk is taken in the market. Eventually, so much risk is taken that instability ensues.
(d) According to Minsky’s theory, proper application of Fiscal Policy (Government Spending) is capable of stabilizing the financial sector (and the overall economy) so as to avoid future large-scale recession.

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