(Last Word) The greater the leverage in the ﬁnancial system, all else equal,
A) the smaller the monetary multiplier.
B) the smaller the proﬁt and loss margins of ﬁnancial ﬁrms.
C) the greater the stability of the ﬁnancial system.
D) the greater the instability of the ﬁnancial system.

Question

Quizplus · Accepted Answer

The greater the leverage in the financial system, the greater the risk of instability as it amplifies both gains and losses. This was evident during the 2008 financial crisis when highly leveraged financial institutions collapsed, leading to a widespread economic downturn. Therefore, option D is the best choice.

(Last Word) the Greater the Leverage in the ﬁNancial System