4. (i) What is a balance sheet recession? What factors make these recessions more difficult to recover from than normal recession? Illustrate a balance sheet recession in the 3-equation model. [15]

(ii) Explain the process through which an economy experiences a house-price based expansion (boom) and collapse. [3]

(ii) In a financial asset feedback process, which factors can contribute to a reduced perception of risk? How does the perceived reduction in risk lead to Investment banks becoming highly leveraged? [7]