During recessions,the value of collateral decreases and corporate profits decrease,so firms do not have cash to finance new investment projects.Therefore,credit rationing depends on the state of the economy.This situation is known as the
A) risk acceptance cost.
B) lender's dilemma.
C) default premium.
D) financial accelerator.

Question

Quizplus · Accepted Answer

The situation described in the question is known as the financial accelerator, where the state of the economy affects credit rationing, with decreased collateral values and corporate profits leading to firms not having enough cash to finance new investments. This situation can lead to a cycle of economic downturn as credit contraction increases the severity of the recession.

During Recessions,the Value of Collateral Decreases and Corporate Profits Decrease,so