_________________________ best describes a situation where a potential borrower knows more about the risks and returns of an investment project than a bank loan officer.
A)Asymmetric information
B)Adverse selection
C)Moral hazard
D)All of the above are correct.

Question

Quizplus · Accepted Answer

Asymmetric information refers to a situation where one party in a transaction has more or better information than the other party. In this case, the potential borrower has more information about the risks and returns of the investment project than the loan officer, which creates an imbalance of information, and constitutes asymmetric information. Adverse selection refers to a situation where one party has more information than the other party in a transaction, but this information is adverse or negative, such as a borrower only seeking a loan when they know they cannot repay it. Moral hazard, on the other hand, refers to a situation where one party takes more risks than they otherwise would because they are insulated from the consequences of their actions, such as taking out a larger loan than they can afford because they know the lender will absorb the losses in case of default. Therefore, the correct answer is A - Asymmetric information.

_________________________ Best Describes a Situation Where a Potential Borrower Knows