The Problem of Adverse Selection Helps to Explain ________

question 51

Multiple Choice

The problem of adverse selection helps to explain ________.

• A) why banks prefer to make loans unsecured
• B) why banks do not have advantage in raising funds for businesses
• C) why borrowers are willing to offer collateral to secure their promises to repay loans
• D) why the financial system is so heavily regulated

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Definitions:

Forward Trade

Agreement to exchange currency at some time in the future.

Agreed-upon

Something that has been mutually accepted or concurred by all parties involved.

LIBOR

An average interest rate calculated through submissions of interest rates by major banks in London, used as a benchmark for short-term interest rates around the world.

Eurodollars

U.S. dollars deposited in banks outside the United States, often used for international transactions.