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 channelling 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

A financial crisis leads to an increase in asymmetric information, which causes severe adverse selection and moral hazard problems. This makes financial markets incapable of channelling funds efficiently, resulting in reduced economic activity and market inefficiency.

A Financial Crisis Occurs When an Increase in Asymmetric Information