In Developing Nations, Microloans

question 20

Multiple Choice

In developing nations, microloans

• A)have enabled small businesses with limited access to credit to purchase capital and expand, allowing greater economic growth.
• B)have increased the indebtedness of impoverished people, slowing economic growth.
• C)are primarily used to finance consumption expenditure, leading to economic growth.
• D)are far too small to have any discernible effect.
• E)discourage saving and investment.

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Definitions:

Principal-Agent Problem

A scenario in which conflicts of interest arise because the goals of a principal (e.g., a shareholder) do not align with those of an agent (e.g., a company executive).

Moral Hazard Problem

The possibility that individuals or institutions will behave more recklessly after they obtain insurance or similar contracts that shift the financial burden of bad outcomes onto others. Example: A bank whose deposits are insured against losses may make riskier loans and investments.

Adverse Selection Problem

A problem arising when information known to one party to a contract or agreement is not known to the other party, causing the latter to incur major costs. Example: Individuals who have the poorest health are most likely to buy health insurance.

Common Good Problem

Common Good Problem occurs when resources that are freely accessible to all members of a society are overused or depleted, often leading to sustainability issues.