If a Firm Borrows a Large Sum of Money, It

question 12

Multiple Choice

If a firm borrows a large sum of money, it may engage in particularly risky investments knowing that if the investments succeed, the firm will make lots of money, while if the investments fail, the firm can declare bankruptcy. This is an example of:

• A) risk taking.
• B) adverse selection.
• C) poor decision making.
• D) Ricardian equivalency.
• E) moral hazard.

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Definitions:

Intelligence Test

An assessment tool designed to measure a person's cognitive capabilities and mental capacity.

Projective Hypothesis

The theory suggesting that people project their own unconscious feelings, desires, and attitudes onto ambiguous stimuli.

Ambiguous Stimulus

A stimulus that lacks clarity or can be interpreted in multiple ways, often used in psychological experiments to explore perception, personality, or decision-making.

Projective Tests

Psychological assessment tools that use ambiguous stimuli to uncover a person’s unconscious desires, fears, and struggles.