If a business firm takes out a loan from a bank, but does not use the funds as the bank intended, the problem is
A)moral hazard.
B)adverse selection.
C)intermediation.
D)securitization.

Question

Quizplus · Accepted Answer

Moral hazard occurs when one party takes risks because they believe they will not have to bear the full consequences of their actions. In this case, if the business firm takes out a loan from a bank and uses the funds for a different purpose than what the bank intended, they are taking a risk and may not be fully liable for any negative consequences that result from their actions.

If a Business Firm Takes Out a Loan from a Bank