When Leverage Is High

question 225

Multiple Choice

When leverage is high,

• A)economic agents must have nearly all money in hand to purchase assets, causing asset prices to rise.
• B)economic agents can purchase assets with very little money down, causing asset prices to rise.
• C)economic agents must make down payments (known as the margin or haircut)in proportion to the value of the asset.
• D)major Wall Street investment banks will exceed historic leverage ratio levels.
• E)future asset prices become more certain inducing more purchases of financial assets.

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Definitions:

Groupthink

A psychological phenomenon that occurs within a group of people, when the desire for harmony or conformity results in an irrational or dysfunctional decision-making outcome.

Conformity

The act of matching attitudes, beliefs, and behaviors to what individuals perceive as normal to their society or social group.

Changing Norms

The process by which societal expectations or standards of behavior evolve over time.

Group Effectiveness

This term describes the degree to which a group achieves its objectives, maintains cohesive relationships among members, and adapts to changing circumstances.