Why Is Adverse Selection More Likely in Financial Markets When

question 20

Multiple Choice

Why is adverse selection more likely in financial markets when interest rates rise?

• A)The remaining borrowers are more likely to be risky.
• B)Higher interest rates are likely to hurt the economy.
• C)If firms have to pay higher interest rates, they may choose to use the funds differently than they first intended.
• D)Banks eliminate risky borrowers by raising interest rates.

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Definitions:

Depletion

Depletion is an accounting method used to allocate the cost of extracting natural resources such as minerals, oil, and gas from the earth over the period they are consumed.

Straight-Line Method

A method of calculating depreciation of an asset, which spreads the cost evenly across its useful life.

Units-of-Activity Method

A depreciation method that allocates costs based on the actual usage or output of the asset rather than time.

Depletion Cost

The allocation of the cost of natural resources, such as minerals or oil, over the period they are extracted and sold.