Which of the following situations is similar to the externality effect?
A)Exercising an adverse material change in conditions clause as a last resort,thereby canceling or repricing a loan commitment.
B)Increase in the cost of funds above normal levels while many FIs scramble for funds to meet their commitments to customers during a credit crunch.
C)In a loan commitment,the borrower takes down only part of the funds over the specified time-period.
D)The buyer of a commercial letter of credit fails to perform as promised under a contractual obligation.

Question

Quizplus · Accepted Answer

An externality effect occurs when the actions of one party impose costs or benefits on others. In option B, the increase in the cost of funds due to many financial institutions scrambling for funds during a credit crunch is an example of a negative externality, as the actions of some institutions affect the cost for others.

Which of the Following Situations Is Similar to the Externality