The Concept of Adverse Selection Helps to Explain All of the Following

question 33

Multiple Choice

The concept of adverse selection helps to explain all of the following except

• A) why firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets.
• B) why indirect finance is more important than direct finance as a source of business finance.
• C) why direct finance is more important than indirect finance as a source of business finance.
• D) why the financial system is so heavily regulated.

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Definitions:

Probability Model

A mathematical representation of a random process, outlining the likelihood of various outcomes.

Official Languages

Languages that are given a special legal status in particular countries, states, or other jurisdictions for official government use.

Belgium

A country located in Western Europe, known for its medieval towns, Renaissance architecture, and as headquarter of the European Union and NATO.

Disjoint

Referring to sets that have no elements in common; also used to describe events that cannot occur at the same time.