A borrower who obtains funds from a lender to purchase additional inventory but uses the funds to finance a trip to Las Vegas for a weekend of gambling at the opening of a new casino is an example of:

Question

Quizplus · Accepted Answer

The borrower's behavior violates the terms of the loan and represents a moral hazard problem, where the borrower takes on excessive risk knowing that they may not suffer the consequences. This behavior increases the lender's risk of default and financial losses. The borrower's behavior is not an example of adverse selection (choice A), free riding (choice B), or lax government regulation (choice D).

A Borrower Who Obtains Funds from a Lender to Purchase