The problem faced by the lender that the borrower may take on additional risk after receiving the loan is called
A)adverse selection.
B)moral hazard.
C)transactions costs.
D)diversification.

Question

Quizplus · Accepted Answer

Moral hazard occurs when the borrower takes on additional risks knowing that they will not fully bear the consequences of their actions because they have already received the loan. This creates a problem for the lender because they may experience losses if the borrower defaults. Adverse selection refers to the problem of the lender not being able to distinguish between high-risk borrowers and low-risk borrowers. Transactions costs refer to the costs of making a transaction, such as the costs of obtaining information or negotiating a contract. Diversification refers to the process of spreading investments across different assets to reduce risk.

The Problem Faced by the Lender That the Borrower May