One result of asymmetric information about people's ability to repay a loan is that
A) loans will only be made to people who don't pay them back.
B) a bank could make many loans to people who don't pay them back.
C) lenders are better off than with perfect information.
D) banks will not make loans.

Question

Quizplus · Accepted Answer

Asymmetric information means that lenders may not have complete information on a borrower's ability to repay a loan. This can lead to lenders making loans to borrowers who are more likely to default, resulting in a high number of loan defaults. This is known as adverse selection. However, in order to mitigate this risk, lenders may charge higher interest rates or require collateral as security, which can make them better off than they would be with perfect information. Therefore, option B is the best choice as it captures this aspect of the impact of asymmetric information on lending.

One Result of Asymmetric Information About People's Ability to Repay