Tom borrows $100,000 from his local bank to purchase inventory for his store for the upcoming holiday season. Tom's neighbor tells him about a get-rich-quick scheme that can take this $100,000 and triple it in a month. Tom decides to buy into this scheme figuring he can repay the bank and still have plenty left for inventory. This is an example of:

Question

Quizplus · Accepted Answer

Tom's decision to invest in a high-risk, high-reward scheme instead of using the borrowed money as intended for inventory shows moral hazard. He is taking on a risky investment without considering the consequences to his initial loan, which can have negative consequences on his ability to repay the loan.

Tom Borrows $100,000 from His Local Bank to Purchase Inventory