One Reaction of Firms to the Adverse Selection Problem Is

question 65

Multiple Choice

One reaction of firms to the adverse selection problem is to

• A)rely on internal funds to finance investment.
• B)use the stock market rather than the bond market to raise funds.
• C)use the bond market rather than the stock market to raise funds.
• D)borrow long-term rather than short-term.

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Definitions:

Inflationary Premium

The part of the total interest rate that represents compensation to the lender for the expected loss of purchasing power due to inflation.

Investments

Investments refer to the allocation of money into assets with the expectation of generating income or profit in the future.

Current Consumption

Current consumption denotes the total goods and services consumed by individuals or the economy at a given time, excluding savings.

Real Interest Rate

The rate of interest an investor expects to receive after inflation has been accounted for.