the economics of money, banking, and financial markets

380 $

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13.4 Managing Credit Risk

1. 
   

   Banks face the problem of ____ in loan markets because bad credit risks are the ones
   most likely to seek bank loans.
   A) adverse selection
   B) moral hazard
   C) moral suasion
   D) intentional fraud
   Answer: A
   Diff: 1 Type: MC Page Ref: 308
   Skill: Recall
   Objective List: 13.3 Discuss how bank managers manage credit risk and interest-rate risk

   
   


2. 
   

   If borrowers with the most risky investment projects seek bank loans in higher proportion to
   those borrowers with the safest investment projects, banks are said to face the problem of
   ____.
   A) adverse credit risk
   B) adverse selection
   C) moral hazard
   D) lemon lenders
   Answer: B
   Diff: 1 Type: MC Page Ref: 308
   Skill: Recall
   Objective List: 13.3 Discuss how bank managers manage credit risk and interest-rate risk

   
   


3. 
   

   Because borrowers, once they have a loan, are more likely to invest in high-risk investment
   projects, banks face the ____.
   A) adverse selection problem
   B) lemon problem
   C) adverse credit risk problem
   D) moral hazard problem
   Answer: D
   Diff: 1 Type: MC Page Ref: 308
   Skill: Recall
   Objective List: 13.3 Discuss how bank managers manage credit risk and interest-rate risk

   
   


4. 
   

   In order to reduce the ____ problem in loan markets, bankers collect information from
   prospective borrowers to screen out the bad credit risks from the good ones.
   A) moral hazard
   B) adverse selection
   C) moral suasion
   D) adverse lending
   Answer: B
   Diff: 1 Type: MC Page Ref: 308 - 309
   Skill: Recall
   Objective List: 13.3 Discuss how bank managers manage credit risk and interest-rate risk