Question

[Related to the Making the Connection in their book This Time Is Different, Carmen Reinhart and Kenneth Rogoff conclude: "An examination of the aftermath of severe postwar financial crises shows that they have had a deep and lasting effect on asset prices, output, and employment." Source: Carmen M. Reinhart and Kenneth S. Rogoff, This Time Is Different Eight Conturies of Financial Foly, Princeton, NJ: Princeton University Press, 2009, p.248 Why should a recession connected with a financial crisis be more severe than a recession that did not involve a financial crisis? O A When financial institutions all credit markets can be damaged, and the amount of borrowing, and hence economic activity, can decrease, further affecting real output OB A recession that includes a financial crisis generally more complex and has more severe con c es, such as increasing asset prices and landing, which affects the economy for a longer time period than a traditional recession OC. Both A and B are correct O D. None of the above. A recension connected with a financial crisis will be s severe than a recession that did not involve a financial

Answer 1

C - both are correct.

When a financial crisis occurs, credit markets are damaged, which affects the borrowing. This further affects growth and output. This makes the recession more severe.

A recession accompanied by a financial crisis is more complex with more severe consequences, and the period of recession tends to be longer.