Moral Hazard May Arise in Lending When Small Firms Borrow

question 126

Multiple Choice

Moral hazard may arise in lending when small firms borrow funds from banks for one project (e.g., buy new machinery for a factory) and actually use the funds in other ways (e.g., buy the manager a new corporate jet) . What is the source of the asymmetric information problem in this case?

• A) The bank has more information about the true cost of the corporate jet than the firm.
• B) The bank has more information about the opportunity cost of the loaned funds.
• C) The firm has more information about the actual use of the funds than the bank.
• D) The firm has more information about the interest rate on the loan than the bank.

---

Definitions:

Injecting Insulin

The process of using a syringe or an insulin pen to deliver insulin, a crucial hormone for people with diabetes, into the body to regulate blood sugar levels.

Appetite

A psychological desire for food, which can be influenced by sensory experiences, emotions, and environmental factors.

Fat Conversion

The biochemical process of transforming fats into energy or other substances within the body.

Insulin Levels

Refer to the concentration of insulin in the bloodstream, which is crucial for regulating blood glucose levels.