Question

1. Group lending provides incentives for individuals to join groups

a. that are diverse.

b. where people self-sort into heterogeneous risk groups.

c. where people self-sort into homogeneous risk groups.

d. that on average work well.

2. In less developed financial markets with moral hazard issues,

a. banks find it optimal to increase interest rates.

b. credit rationing and adverse selection provide the best tools for banks to lower default rates.

c. collateral and monitoring are not efficient.

d. banks are better off not lending.

3. In most lending arrangements banks use collateral to

a. increase the value of the loan and the return on interest from it.

b. mitigate the presence of moral hazard issues.

c. ensure that a minimum amount of the loan is repaid.

d. create an incentive for the borrower to increase the amount of the loan.

4. Microcredit institutional lending helps to prevent moral hazard issues because

a. with group lending, individual group members are liable for others members’ loan repayment.

b. groups conduct adverse selection processes against different types of loans.

c. all group members have identical loans, and therefore group risk level is low.

d. only safe loans will be approved.

5. Microcredit is a very promising financial institutional innovation because it

a. secures access to loanable funds for the poor.

b. eliminates credit rationing and credit constraints.

c. provides a real solution to issues relating to absence of collateral and high monitoring costs on small loans.

d. allows lenders to charge the same interest rate to safe and risky loans.

Answer 1