Question

When borrowers engage in activities that reduce the probability of loans being paid back to​ lenders, it is the problem of?

▼

a) moral hazard

b) adverse selection

It occurs

▼

a) after

b) before

the transaction?

When the funds are lent to those among potential borrowers who are actually the bad credit​ risks, it is the problem of?

▼

moral hazard

adverse selection

It occurs

▼

a) before

b) after

the transaction.?

Both these problems are caused due to?

▼

a) asymmetric information

b) symmetric information

Due to these problems​?

▼

a) lenders and borrowers may lower the amount of transactions

b) lenders may decide not to make any loans

c) borrowers may decide not to take any loans

.

Answer 1

1)

When borrowers purposefully engage in such activities that reduce the probability of repayment of loans back to the lenders , it is attributed to the problem of

a) Moral hazard since borrowers have no lack of incentive to guard against risk.

2)

Moral hazard usually occurs a) after the transaction after the loan is lent to the borrower.

3)

When funds are lent to borrowers who have bad credit risks, then it is a problem of adverse selection as the lender does not have information that borrower has about the borrowers quality of repayment.

4)

Adverse selection typically occures b) Before the transaction of the loan as it is a market situation with unequal information for both lenders and borrowers.

5)

Both above problems are caused due to a) asymmetric information between the lender and the borrower. When lender does not posess

6)

As both the above problems are for lenders and not borrowers, b) lenders may decide not to make any loans