The World Bank has extended a loan to Country X to build a new toll road and counts on the repayment of the loan from the collected tolls. After the funds have been transferred to the country, the government decides to spend the money to build a new presidential palace. This is an example of

Question

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This is an example of moral hazard because the government is taking a risk with the money that was intended for a specific purpose (building a toll road) and using it for a different purpose (building a presidential palace). The World Bank relied on the government's intention to collect tolls to repay the loan, but now that the money has been diverted to a different project, there is no guarantee that the loan will be repaid as planned.

The World Bank Has Extended a Loan to Country X