Financial Instability: Leverage, Risk & Public Responses — Practice · Grade 12 Social Studies

Chapter: Global Connections, Risk & Economic Inquiry

What this practice covers

By the end of Financial Instability: Leverage, Risk & Public Responses you should be able to:

8 questions, written answer, each with a worked explanation.

Vocabulary used: leverage, equity, maturity mismatch, securitization, correlation.

Problem 1

Why does leverage magnify the percentage change in equity?
Answer and explanation

Equity is the smaller residual after debt. The same $10 asset loss removes half the original $20 equity while reducing $100 assets by ten percent. Fixed debt in the example concentrates the change on the residual.

Problem 2

Why is a liquidity measure different from correcting insolvency?
Answer and explanation

Liquidity concerns payment timing and available resources; insolvency concerns insufficient asset value relative to obligations. Temporary funding may address timing while losses remain. Identify both balance-sheet and cash-flow evidence.

Problem 3

Why can a pooled financial product remain vulnerable to common losses?
Answer and explanation

Its underlying claims may share borrowers’ conditions, collateral markets, or other exposures. Pooling changes allocation and may reduce some idiosyncratic risk, but correlated losses remain. Examine the actual connections and model assumptions.

Problem 4

Why should stabilization and household recovery be evaluated separately?
Answer and explanation

They are different outcomes measured through different records and periods. Financial conditions can improve while employment, debt, or housing hardships persist. Compare channels and distribution without transferring one indicator to every household.

Problem 5

Invented entity: assets $100, debt $80; assets then fall to $90; debt is unchanged; fees and further transactions excluded. Calculate equity before and after, and percentage changes.
Answer and explanation

Equity falls from $20 to $10. Assets decline ten percent, while equity declines fifty percent. The loss is magnified relative to the smaller residual under fixed-debt assumptions. The packet does not establish cash timing, asset-sale effects, regulatory treatment, or a complete historical cause; those require additional evidence.

Subtract debt from assets.

Compare asset loss with initial assets.

Compare equity loss with initial equity.

Response criteria

  • Explain the relevant institution or economic concept accurately; show correct calculations where needed.
  • Connect supplied evidence and stated assumptions to an explained conclusion.
  • Compare feasible options and their effects on different people without stereotypes.
  • Identify a limitation, tradeoff, uncertainty, or condition that qualifies the conclusion.

Problem 6

Does securitization make underlying borrower risk disappear?
Answer and explanation

No. It redistributes claims and exposures. Borrower performance, collateral, correlation, information, and contract terms still matter. A pool or rating is not a guarantee against common losses.

Response criteria

  • Explain the relevant institution or economic concept accurately; show correct calculations where needed.
  • Connect supplied evidence and stated assumptions to an explained conclusion.
  • Compare feasible options and their effects on different people without stereotypes.
  • Identify a limitation, tradeoff, uncertainty, or condition that qualifies the conclusion.

Problem 7

Invented assets 200 and debt 150; assets decline to 180 with debt unchanged. Calculate equity and its percentage loss.
Answer and explanation

Equity falls from 50 to 30, a forty percent loss, while assets fall ten percent. Fixed debt magnifies the residual change. Liquidity, valuation reliability, and further transactions are excluded from this balance-sheet model.

Response criteria

  • Explain the relevant institution or economic concept accurately; show correct calculations where needed.
  • Connect supplied evidence and stated assumptions to an explained conclusion.
  • Compare feasible options and their effects on different people without stereotypes.
  • Identify a limitation, tradeoff, uncertainty, or condition that qualifies the conclusion.

Problem 8

A historical inquiry recommends a reform. What records would test whether the reform later worked?
Answer and explanation

Identify adoption, implementation, defined outcomes, dates, comparable measures, distribution, and alternative explanations. The recommendation establishes a proposed mechanism, not completed action or measured success. Distinguish findings, dissent, and later evidence.

Response criteria

  • Explain the relevant institution or economic concept accurately; show correct calculations where needed.
  • Connect supplied evidence and stated assumptions to an explained conclusion.
  • Compare feasible options and their effects on different people without stereotypes.
  • Identify a limitation, tradeoff, uncertainty, or condition that qualifies the conclusion.

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