When the financial system lacks the capability of making judgement about investment opportunities due to asymmetric information leading to potentially bad credit risks lending is subject to ?
Correct answer: A. adverse selection
- A. adverse selection
- B. moral hazard
- C. social goods
- D. hyperinflation
Explanation
Adverse selection occurs before lending when asymmetric information prevents lenders from distinguishing safe borrowers from risky ones. Moral hazard arises after lending, when borrowers may change their behaviour because they do not bear the full consequences.
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