Let us suppose that you apply for a loan with a bank. You tell the bank that you are going to remodel your kitchen, but after you get the loan you go to Las Vegas to gamble with the money. Your behavior is an example of

Question

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Moral hazard refers to the behavior of the borrower after obtaining the loan, where they may take on undue risk or engage in reckless behavior because they do not bear the full consequences of their actions. In this case, the borrower has misled the bank about the intended use of the loan and engaged in a behavior that was not part of the original agreement, which is an example of moral hazard. Adverse selection refers to the problem of imperfect information before the loan is given, where the bank may not have access to all relevant information to assess the creditworthiness of the borrower. Direct and indirect credit allocation relate to how credit is assigned to specific sectors or industries, which is not relevant to this scenario.

Let Us Suppose That You Apply for a Loan with a Bank