John takes out a student loan at a bank but spends his money in Las Vegas to play at the casino.This situation is an example of
A)moral hazard.
B)moral suasion.
C)adverse selection.
D)fraud.

Question

Quizplus · Accepted Answer

Moral hazard refers to the risk that a borrower may engage in risky or irresponsible behavior once they obtain a loan, knowing that the lender will bear the consequences. In this case, John took out a student loan but spent the money irresponsibly at a casino, demonstrating moral hazard. Moral suasion refers to persuasion or encouragement to behave in a certain way, which is not relevant in this scenario. Adverse selection refers to the risk that a borrower with a higher likelihood of default is more likely to apply for a loan, which is also not relevant in this scenario. Fraud refers to intentional deception or misrepresentation, which may not be the case here as there is no information to suggest that John deliberately misled the bank.

John Takes Out a Student Loan at a Bank but Spends