Each of the Following Is an Example of Moral Hazard

question 21

Multiple Choice

Each of the following is an example of moral hazard in which people modify their behavior in an opportunistic way,often frustrating the intent of governmental or management policies.Which is NOT an example of moral hazard?

• A) After a firm gets a loan from a bank to purchase inventory,the borrower instead decides to use it to invest in call options on stocks.
• B) Based on motorcycle accident data,a state passes a law requiring motorcyclists to wear helmet,but then the motorcyclist wearing helmets start to drive faster and more recklessly.
• C) Bank and nonbank mortgage lenders make money granting loans.But the Government through Freddie Mac and Fannie Mae decides to purchase these loans.The mortgage lenders find that they earn a fee for each mortgage that they grant and then sell to Freddie Mac or Fannie Mae.Since they never intended on holding on to the mortgage,the mortgage granters are not too particular on whether the customer can really pay it back.The lowest quality loans are sold to the Government.
• D) A fellow buys a $1 million life insurance policy and then travels to Nepal to climb Mount Everest.
• E) A student learns that if he or she reads the chapter and studies lecture notes,the student does better on the next test.

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Definitions:

Hardwood

A type of wood that comes from angiosperm trees, distinguished by its dense and durable qualities, often used in furniture, flooring, and construction.

Clayton Act

A U.S. legislation enacted in 1914 aimed at promoting fair competition and preventing unfair business practices such as monopolies and anticompetitive mergers.

Interstate Commerce

The trade, traffic, or transportation of goods across state lines within the United States subject to federal regulation.

Fair Trade Practices

Business practices characterized by fair and ethical agreements, especially in international trade, providing equitable commerce conditions.