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11 3. Credit rationing appears to violate competitive market clearing in the loan market. Two arguments have been used to rationalize credit rationing: (a) Moral

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11

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3. Credit rationing appears to violate competitive market clearing in the loan market. Two arguments have been used to rationalize credit rationing: (a) Moral hazard; and (b) Adverse selection. Choose one of these arguments to illustrate why credit rationing can occur. Are they the only reasons for credit rationing? Hint: GTB pages 178-184 and Examples 8.2 and 8.3

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