1. What is a balance sheet recession? What factors make these recessions more difficult to

recover from than normal recessions? Illustrate a balance sheet recession in the 3-equation

model.

2.Discuss the following statement: 'central banks can offset the fall in borrower demand in

a balance sheet recession by reducing interest rates and inducing savers to spend more'.

Illustrate your answer using the 3-equation model.

3.What are the three key characteristics of systemic banking crises? How would you expect

these characteristics to influence the IS curve?