A decline in asset prices can lead to ________.
A) worsening adverse selection and moral hazard problems
B) declining uncertainty
C) increased economic activity
D) anticipated increase in the price level

Question

Quizplus · Accepted Answer

A decline in asset prices can lead to worsening adverse selection and moral hazard problems. This is because as asset prices decline, borrowers who are more likely to default may be more likely to seek loans, leading to adverse selection. Additionally, lenders may be more willing to take risks knowing that they will be bailed out in the event of a default, leading to moral hazard.

A Decline in Asset Prices Can Lead to ________