An increase in asymmetric information that increases financial frictions will tend to ________.
A)increase the moral hazard and adverse selection problems in credit markets
B)decrease financial frictions
C)improve market efficiency
D)decrease the moral hazard problem

Question

Quizplus · Accepted Answer

Asymmetric information refers to the situation where one party in a transaction has more information than the other party. This leads to issues such as adverse selection and moral hazard in credit markets. Adverse selection occurs when borrowers who are most likely to default are the ones who seek credit, while moral hazard arises when borrowers take on excessive risk because they expect to be bailed out. Therefore, an increase in asymmetric information will aggravate these problems, leading to higher financial frictions.

An Increase in Asymmetric Information That Increases Financial Frictions Will