If the market interest rate is 5% and a bank advertises loans at 12%,the bank will receive
A) no applications.
B) applications from mostly low-risk borrowers.
C) applications from mostly high-risk borrowers.
D) a moral hazard.

Question

Quizplus · Accepted Answer

If the bank is advertising loans at a much higher rate than the market interest rate, it is likely that only high-risk borrowers who cannot obtain loans at lower rates will apply for the loan. This is because low-risk borrowers have the option to obtain loans from other banks at lower rates, and would not opt for a high interest rate loan from this bank. Therefore, the bank is likely to receive applications from mostly high-risk borrowers.

If the Market Interest Rate Is 5% and a Bank