If borrowers with the most risky investment projects seek bank loans in higher proportion to those borrowers with the safest investment projects,banks are said to face the problem of
A)adverse credit risk.
B)adverse selection.
C)moral hazard.
D)lemon lenders.

Question

Quizplus · Accepted Answer

Adverse selection is the problem faced by banks in which borrowers with the riskiest investment projects are more likely to seek loans from banks than those with safer projects. This leads to an imbalance in the quality of borrowers in the lending pool, making it difficult for banks to assess and manage credit risk effectively.

If Borrowers with the Most Risky Investment Projects Seek Bank