If banks experience higher costs in making loans,they may decide to
A) engage in credit rationing rather than raise interest rates in an attempt to increase adverse selection.
B) engage in credit rationing rather than raise interest rates in an attempt to not increase adverse selection.
C) raise interest rates rather than engage in credit rationing in an attempt to decrease adverse selection.
D) raise interest rates rather than engage in credit rationing in an attempt to eliminate adverse selection.

Question

Quizplus · Accepted Answer

Credit rationing occurs when banks limit the amount of loans to avoid the risks associated with higher interest rates, which can increase adverse selection. By not raising interest rates, banks aim to not exacerbate adverse selection, where only riskier borrowers are willing to take loans at higher rates.

If Banks Experience Higher Costs in Making Loans,they May Decide