5. The following quote about the financial system is taken from Alessandri and Haldane (2009):

'Although diversification may purge idiosyncratic risk, it simultaneously reduces diversity and thereby increases systematic risk'. Explain the quote and how it relates to the vulnerability ofthe financial system to crises. Make sure your answer fully explains the terms in italics in the quote.

9. What policy mistakes were made in the Great Depression? How can these mistakes be shown using the 3-equation model? Show in a diagram how fiscal stimulus could have averted a deflation trap.

10. Discuss the following statement: 'Balance sheet recessions involve a debt overhang, hence the government should impose austerity to reduce the debt burden'.