Suppose a Bank Purchases $100 of an Asset

question 69

Multiple Choice

Suppose a bank purchases $100 of an asset. To finance this purchase, it uses $99 dollars of borrowed funds and $1 of bank capital. To what does this lead?

• A) moral hazard
• B) adverse selection
• C) Ricardian equivalence
• D) the butterfly effect
• E) irrational exuberance

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Definitions:

Market Advantage

A favorable position a company gains in the market, typically through superior products, marketing strategies, or cost efficiencies, which provides a competitive edge over rivals.

Limited Partnership

A business structure where one or more general partners manage the company and are liable for its debts, while the limited partners have limited liability and do not manage the company.

Management Responsibilities

The duties and tasks associated with directing and controlling an organization or one of its units, including planning, organizing, leading, and controlling.

Invest

The act of allocating resources, usually money, with the expectation of generating an income or profit.