Banks deal with problems of adverse selection by
A)charging high interest rates.
B)gathering information about the default risk of borrowers.
C)making only short-term loans.
D)making only long-term loans.

Question

Quizplus · Accepted Answer

Gathering information about the default risk of borrowers helps banks to identify and avoid lending to high-risk borrowers, reducing adverse selection problems. Charging high interest rates or limiting loan terms may also address adverse selection to some extent, but they may also deter low-risk borrowers from borrowing and may not necessarily address the root cause of adverse selection.

Banks Deal with Problems of Adverse Selection by