A financial crisis occurs when an increase in asymmetric information from a disruption in the financial system
A)causes severe adverse selection and moral hazard problems that make financial markets incapable of channeling funds efficiently.
B)allows for a more efficient use of funds.
C)increases economic activity.
D)reduces uncertainty in the economy and increases market efficiency.

Question

Quizplus · Accepted Answer

Asymmetric information refers to a situation where one party to a transaction has more information than the other party, leading to adverse selection and moral hazard problems. During a financial crisis, this information asymmetry increases, making it difficult for financial markets to allocate resources efficiently. This, in turn, leads to severe adverse selection and moral hazard problems, further exacerbating the crisis.

A Financial Crisis Occurs When an Increase in Asymmetric Information