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:

Constrained Resource

A limited or scarce resource in a production process that can restrict the throughput or output of the entire system.

Milling Machine Time

The time required for a milling machine to complete a piece of work, often considered in manufacturing cost calculations.

Demand Satisfaction

The fulfillment of consumer desires and needs through the provision of products or services.

Production Facility

A site or plant where goods are produced or manufactured, equipped with specialized equipment for production activities.