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:

Uncollectible Account

Refers to receivables that a company has deemed impossible to collect, recognizing it as a bad debt expense.

Repayment of Loan

The process of paying back borrowed money to the lender, typically involving periodic payments of principal and interest over a set term.

Accrual Basis

An accounting method where revenue and expenses are recorded when they are earned or incurred, regardless of when the cash is actually received or paid.

Accounts Payable

Liabilities of a business that are due to creditors within a short period of time, usually for the purchase of goods and services.