Question

A leverage ratio is any one of several financial measurements that look at how much capital a firm holds in relation to its total assets. For our purposes we define the bank's leverage ratio as equity capital divided by total assets.*

Go to the St. Louis Federal Reserve FRED database, and find data on assets less liabilities, i.e. bank capital (RALACBM027SBOG), and total assets of commercial banks(TLAACBM027SBOG). Starting in January 1995 until the most recent period, calculate the bank leverage ratio and create a line graph of the leverage ratio this sample (include the graph you created with your submission). Given the path of bank leverage over time, what can you conclude about moral hazard in the banking system over the time period considered?

* - Just to show how nebulous the definition of the leverage ratio, the inverse of this ratio is also called a leverage ratio in other contexts.

Answer 1

Keynesian macroeconomics argues that the solution to a recession is expansionary fiscal policy that shifts the aggregate demand curve to the right.Keynesian economics is an economic theory of total spending in the economy and its effects on output and inflation.

Keynesian economics is sometimes referred to as "depression economics," as Keynes's General Theory was written during a time of deep depression not only in his native land of the United Kingdom but worldwide. The famous 1936 book was informed by directly observable economic phenomena arising during the Great Depression, which could not be explained by classical economic theory.