Because of the Problems of Adverse Selection and Moral Hazard

question 221

Multiple Choice

Because of the problems of adverse selection and moral hazard, it has been suggested that the World Bank and International Monetary Fund

• A) make loans to the riskiest nations so that private investors will not be tempted to take a risk.
• B) loan only to countries that have free elections.
• C) not make loans to risky nations because there is a high demand for funds from safer nations.
• D) impose tougher preconditions on borrowers.

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Definitions:

Holder in Due Course

A legal term referring to a person who has acquired a negotiable instrument in good faith, for value, and without notice of any defect or claim against it.

Bureau of Consumer Financial Protection

A U.S. government agency that ensures consumers are treated fairly by banks, lenders, and other financial companies.

Payee

The individual or entity to whom a payment is to be made or is made.

Certificate of Deposit

A savings certificate entitling the bearer to receive interest, which has a fixed maturity date and specified fixed interest rate.