Which of the Following Reduces the Risk of Moral Hazard

question 9

Multiple Choice

Which of the following reduces the risk of moral hazard and the bank's risk in making loans?

• A)Collateral
• B)Adverse selection
• C)Fixed interest rate
• D)Securitization

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Definitions:

Opportunity Cost

The price paid for not selecting the next most favorable choice when deciding.

Market Interest Rates

The prevailing rates at which borrowers can obtain loans and lenders can invest in debt securities, influenced by the overall demand and supply.

Precautionary Motive

The need to hold cash as a safety margin to act as a financial reserve.

Liquidity

The ease with which an asset can be converted into cash without affecting its market price.