Financial intermediaries can manage the problems of adverse selection and moral hazard. a. They can reduce adverse

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Financial intermediaries can manage the problems of adverse selection and moral hazard.

a. They can reduce adverse selection by collecting information on borrowers and screening them to check their creditworthiness.

b. They can reduce moral hazard by monitoring what borrowers are doing with borrowed funds.

c. In the end, the vast majority of firms’ finance comes from internal sources, suggesting that information problems are too big for even financial intermediaries to solve.

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Money Banking And Financial Markets

ISBN: 9781260226782

6th Edition

Authors: Stephen Cecchetti, Kermit Schoenholtz

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