The Concept of Adverse Selection Helps to Explain

question 31

Multiple Choice

The concept of adverse selection helps to explain

• A)why collateral is not a common feature of many debt contracts.
• B)why large,well-established corporations find it so difficult to borrow funds in securities markets.
• C)why financial markets are among the most heavily regulated sectors of the economy.
• D)why stocks are the most important source of external financing for businesses.

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Definitions:

Commodity Money

Anything that serves both as money and as a commodity; money that has intrinsic value such as gold or silver coins.

Double Coincidence

A situation in a barter system where two parties each hold an item the other wants, necessitating an exact match to complete an exchange.

Trade

The exchange of goods, services, or both between countries or individuals, allowing for the specialization and efficiency benefits.

Relative Values

A measure of the worth or importance of one thing in comparison to another, often used in economics to compare the value of different commodities or services.