Adverse Selection Is a Problem Associated with Equity and Debt

question 30

Multiple Choice

Adverse selection is a problem associated with equity and debt contracts arising from

• A)the lender's relative lack of information about the borrower's potential returns and risks of his investment activities.
• B)the lender's inability to legally require sufficient collateral to cover a 100% loss if the borrower defaults.
• C)the borrower's lack of incentive to seek a loan for highly risky investments.
• D)the lender's inability to restrict the borrower from changing his behavior once given a loan.

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Definitions:

Output Levels

Output levels refer to the quantity of goods and services produced by an economy or firm during a specific period.

Recessionary Gap

A situation in which the real GDP of an economy is lower than its potential GDP at the full employment level, indicating underutilized resources.

Actual Output

Actual output refers to the real GDP or the total value of all goods and services produced in an economy at a given time, contrasting with potential output.

Expected Price Level

The anticipation or forecast of future prices across an economy, affecting consumer and business decisions.