Question
In: Economics
Suppose Juanita comes into a large sum of money and decides to lend the money to...
Suppose Juanita comes into a large sum of money and decides to lend the money to earn interest. She realizes that she does not have the expertise to evaluate the credit risks of potential borrowers. As she struggles to evaluate these risks, Juanita ultimately decides that her local bank has experience and knowledge about potential borrowers and their probability of repayment, and she decides to lend through the local bank, a financial intermediary. This is an example of how financial intermediaries can help solve the problem of: Insolvency? Moral Hazard? Adverse Selection?
Solutions
Expert Solution
Answer is c
Adverse selection is one in which one player have more knowledge or more information which the other player doesnot have.
Rahul Sunny answered 2 years agoRelated Solutions
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Brandtly Industries invests a large sum of money in R&D; as a result, it retains and...
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a result, it retains and reinvests all of its earnings. In other
words, Brandtly does not pay any dividends, and it has no plans to
pay dividends in the near future. A major pension fund is
interested in purchasing Brandtly's stock. The pension fund manager
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Brandtly Industries invests a large sum of money in R&D; as a result, it retains and...
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a result, it retains and reinvests all of its earnings. In other
words, Brandtly does not pay any dividends, and it has no plans to
pay dividends in the near future. A major pension fund is
interested in purchasing Brandtly's stock. The pension fund manager
has estimated Brandtly's free cash flows for the next 4 years as
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interested in purchasing Brandtly's stock. The pension fund manager
has estimated Brandtly's free cash flows for the next 4 years as
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