Which situation is the clearest example of moral hazard in lending?
Correct answer: A. A borrower takes greater risks after receiving a loan
- A. A borrower takes greater risks after receiving a loan
- B. A lender checks a borrower's income before lending
- C. A saver compares rates at different banks
- D. A bank records interest earned on a loan
Explanation
Moral hazard occurs when a party changes behaviour after entering an agreement because some consequences are borne by another party. A borrower taking excessive risks after obtaining finance is a standard example.
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Business finance covers capital requirements, sources of funds, budgeting, cash flow, investment decisions and basic financial statements and ratios. Banking includes commercial bank functions, deposits, loans, credit creation, interest and the role of a central bank, including its monetary policy and regulatory functions.
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