A colleague tells you that he can get a business loan from the bank, but the rate seems very high for what your colleague considers a low-risk loan.

Use the following table to classify each explanation for the high rate as an instance of either adverse selection or moral hazard.

Explanation for High Rate: ------------------------------------------- The bank cannot determine which borrowers are likely to pay back the loan and which are likely to default. _______ADVERSE SELECTION____OR____MORAL HAZARD______ The bank believes your friend, if given access to financing at low rates, would use the money frivolously. _______ADVERSE SELECTION____OR____MORAL HAZARD______ 

You advise your friend to disclose all of his past financial records and credit history to the bank to show that he is likely to pay back the loan.

Your advice is more likely to solve the problem of_______ADVERSE SELECTION____OR____MORAL HAZARD______