If a borrower's net worth increases:

Question

Quizplus · Accepted Answer

A borrower's net worth is the difference between their assets and liabilities. An increase in net worth indicates that their assets have grown or their liabilities have decreased. This demonstrates the borrower's ability to manage their finances and reduces the risk of moral hazard for potential lenders. Therefore, option C is correct - the moral hazard risk for potential lenders decreases. Option A is incorrect because an increase in net worth indicates greater financial responsibility and would therefore decrease the likelihood of moral hazard. Option B is incorrect because an increase in net worth may make the borrower more risk averse, not risk-seeking. Option D is incorrect as an increase in net worth does not directly impact the supply of loans.

If a Borrower's Net Worth Increases