Lenders may be reluctant to increase the interest rate they charge borrowers because these higher interest rates may
A) attract less creditworthy borrowers, increasing adverse selection.
B) attract less creditworthy borrowers, decreasing adverse selection.
C) attract more creditworthy borrowers, increasing adverse selection.
D) attract more creditworthy borrowers, decreasing adverse selection.

Question

Quizplus · Accepted Answer

When lenders increase their interest rates, they may attract less creditworthy borrowers who cannot find lower rates elsewhere. This can lead to adverse selection, as the lender is left with a riskier pool of borrowers who may default on their loans. Therefore, option A is the best choice, as it explains why lenders may be reluctant to increase interest rates.

Lenders May Be Reluctant to Increase the Interest Rate They