Why might you be willing to make a loan to your neighbor by putting funds in...

Why might you be willing to make a loan to your neighbor by putting funds in a savings account earning a 5% interest rate at the bank and having the bank lend her the funds at a 10% interest rate rather than lend her the funds yourself? A. Your neighbor suffers from information asymmetry. B. There will always be a moral hazard problem in lending to a friend or neighbor. C. The costs of writing up the loan contract might exceed the 5% difference between your deposit rate and the bank lending rate. D. There is no way to diversify your savings except with the help of a bank.

Expert Solution

Option B there is always be a problem of moral hazard in lending to a friend or neighbor

REASON- moral hazard is a situation in which one party gets involved in a risky event, giving loan to a friend or neighbor might be riskier. There is always a risk that a borrower ( friend) might get involve in activities that are not desirable from lender point of view and as a friend there are less chances of getting loan repaid, or they might not use money properly. Therefore it is safe to keep money in bank as if bank gives loan then there is less risk of default.

Rahul Sunny answered 2 years ago

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