Asymmetric Information Poses Two Important Obstacles to the Smooth Flow

question 30

Multiple Choice

Asymmetric information poses two important obstacles to the smooth flow of funds from savers to investors. They are:

• A) adverse selection, which arises before the transaction occurs, and moral hazard, which occurs after the transaction.
• B) moral hazard, which arises before the transaction occurs, and adverse selection, which occurs after the transaction.
• C) adverse selection and moral hazard, both of which occur after the transaction.
• D) adverse selection and moral hazard, both of which occur before the transaction.

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Definitions:

Industrial-Development Bond

A government-issued bond to support the development of industrial projects, often tax-exempt for the buyer.

Revenue Bond

A type of municipal bond supported by the revenue from a specific project or source, rather than general tax revenues.

General-Obligation Bond

A type of municipal bond that is secured by the full faith and credit of the issuing government, including its taxing power to repay the bondholders.

Russell 2000

A gauge that tracks the performance of around 2000 of the smallest American firms listed in the Russell 3000 Index.