The reason why a bank would ration credit is that

Question

Quizplus · Accepted Answer

Choice A is incorrect as it suggests that the interest rate is too low, which would actually encourage rather than discourage lending.

Choice B may be a reason for a bank to ration credit, but it is not the primary reason.

Choice C is a primary reason for rationing credit, as the bank may feel that the expected profit from lending at a higher rate is not worth the risk due to adverse selection.

Therefore, the best choice is E, as it suggests that rationing credit can be a result of both adverse selection and moral hazard problems.

The Reason Why a Bank Would Ration Credit Is That