Chapter 1. Section 12(24), Problem 10

Step 1

Work It Out

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You must read each slide, and complete any questions on the slide, in sequence.

Question

Which of the following are examples of debt overhang? Which examples are likely to lead to a cutback in spending?

Your uncle starts a restaurant, borrowing to fund his investment. The restaurant fails, and your uncle must shut down but still must pay his debt.

The following statement bfdtn5PFpMarVC8x2zfiEQ== an example of a debt overhang and spending will ihyXI3vweKBVkqtuOIeAYqcmI9iXy7Xh.

Correct! For further review see section, "Why Are Banking-Crisis Recessions So Bad."

Sorry, this is an example of debt overhang because your uncle is left with high debt and diminished assets. Your uncle will likely cut back on his spending in order to repay the debt from the failed restaurant and to rebuild his assets. For further review see section, “Why Are Banking-Crisis Recessions So Bad.”

The following statement ______ an example of a debt overhang and spending will ______. Your uncle starts a restaurant, borrowing to fund his investment. The restaurant fails, and your uncle must shut down but still must pay his debt.

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Step 2

Question

Which of the following are examples of debt overhang? Which examples are likely to lead to a cutback in spending?

Your parents take out a loan to buy a house. Your father is transferred to a new city, and now your parents must sell the house. The value of the house has gone up during the time your family has lived there.

The following statement I3+WRtmdgg+BxWMPIH9V1w== an example of a debt overhang and spending will Z5/pDly332AjV3TKqM8FMDiwwqSIBbJS.

Correct! For further review see section, "Why Are Banking-Crisis Recessions So Bad."

Sorry, this is not an example of debt overhang because your parents can sell the house and still have money left over after repaying the loan. It is likely that they will feel wealthier and increase spending. For further review see section, “Why Are Banking-Crisis Recessions So Bad.”

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Step 3

Question

Which of the following are examples of debt overhang? Which examples are likely to lead to a cutback in spending?

Your friend’s parents take out a loan to buy her a condo to live in while she is at college. Meanwhile, the housing market plummets. By the time your friend leaves college, the condo is worth significantly less than the value of the loan.

The following statement bfdtn5PFpMarVC8x2zfiEQ== an example of a debt overhang and spending will ihyXI3vweKBVkqtuOIeAYqcmI9iXy7Xh.

Correct! For further review see section, "Why Are Banking-Crisis Recessions So Bad."

Sorry, this is an example of debt overhang because your friend’s parents are left with a loan that is worth more than the value of the condo. They will likely cut back on spending in order to repay the loan and rebuild their assets. For further review see section, “Why Are Banking-Crisis Recessions So Bad.”

The following statement ______ an example of a debt overhang and spending will ______. Your friend’s parents take out a loan to buy her a condo to live in while she is at college. Meanwhile, the housing market plummets. By the time your friend leaves college, the condo is worth significantly less than the value of the loan.

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Step 4

Question

Which of the following are examples of debt overhang? Which examples are likely to lead to a cutback in spending?

You finish college with an honors degree in a field with many good job prospects and with $25,000 in student loans that you must repay.

The following statement I3+WRtmdgg+BxWMPIH9V1w== an example of a debt overhang and spending will Z5/pDly332AjV3TKqM8FMDiwwqSIBbJS.

Correct! For further review see section, "Why Are Banking-Crisis Recessions So Bad."

Sorry, this is not an example of debt overhang. Although you leave college with a large amount of debt, you also leave with an honors degree, which is a valuable asset. It is unlikely that you will cut back on spending because it is very likely that you will now have a job. For further review see section, “Why Are Banking-Crisis Recessions So Bad.”

The following statement ______ an example of a debt overhang and spending will ______. You finish college with an honors degree in a field with many good job prospects and with $25,000 in student loans that you must repay.

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