If Borrowers with the Most Risky Investment Projects Seek Bank

question 137

Multiple Choice

If borrowers with the most risky investment projects seek bank loans in higher proportion to those borrowers with the safest investment projects,banks are said to face the problem of

• A)adverse credit risk.
• B)adverse selection.
• C)moral hazard.
• D)lemon lenders.

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Definitions:

Liability

Legal responsibility or obligation for actions, debts, or losses, possibly subjecting a person or entity to legal penalties.

Adjustment Refusal

A response or decision not to modify or change a position, policy, or approach despite requests or suggestions to do so.

General Plan

A comprehensive layout or blueprint guiding the overall objectives and strategies of an endeavor.

Counterproposal

A proposal offered in response to one previously made, usually differing in details or terms.