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© 2014 Pearson Canada Inc.#
In the absence of asymmetric information, the lemons problem ____.
A) goes away
B) becomes worse
C) is not important
D) remains the same
Answer: A
Diff: 1 Type: MC Page Ref: 165
Skill: Recall
Objective List: 8.1 Depict how asymmetric information results in adverse selection and moral
hazard
The solution to the adverse selection problem in financial markets is to ____.
A) supply lenders with full details on the borrowers
B) supply borrowers with full details on the lenders
C) supply governmental agencies with financial information
D) produce more free riders
Answer: A
Diff: 2 Type: MC Page Ref: 166
Skill: Recall
Objective List: 8.1 Depict how asymmetric information results in adverse selection and moral
hazard
The remedies for the adverse selection include all but the following.
A) private production and sale of information
B) free-riding
C) government regulation
D) financial intermediation
Answer: B
Diff: 1 Type: MC Page Ref: 166 - 170
Skill: Recall
Objective List: 8.1 Depict how asymmetric information results in adverse selection and moral
hazard
Explain the problem of asymmetric information, adverse selection and moral hazard, and
why these problems are important for the financial system.
Answer: Asymmetric information is an imbalance of information between two parties to a
contract. In financial markets, lenders know less about a borrower's planned use of the lender's
funds than does the lender. The problem of adverse selection arises when the least qualified
individuals are more likely to apply for loans. This is a problem that exists prior to making a
loan. Moral hazard is a problem that exists after a loan has been made. This is the problem that
the borrower will take excessive risks, or behave in ways that jeopardize repayment of a loan.
These problems exist for all financial contracts.
Diff: 3 Type: SA Page Ref: 164 - 166
Skill: Recall
Objective List: 8.1 Depict how asymmetric information results in adverse selection and moral
hazard