question archive What is the moral hazard problem? a) The problem that managers may experience distinguishing low-risk borrowers from high-risk borrowers before approving a mortgage
What is the moral hazard problem? a) The problem that managers may experience distinguishing low-risk borrowers from high-risk borrowers before approving a mortgage
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What is the moral hazard problem?
a) The problem that managers may experience distinguishing low-risk borrowers from high-risk borrowers before approving a mortgage.
b) The problem that managers of a financial firm will take on riskier investments because they believe the federal government will save them from bankruptcy.
c) The problem that managers of a financial firm may have more information about risky investments than the federal government does.
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The correct answer is choice B.
The problems that managers of a financial firm will take on riskier investment because they believe the federal government will save them from bankruptcy is a moral hazard. It does not abide by social ethics. Such acts violate the rule of law and are a misuse of information and freedom accorded to them. Therefore, such managers should be punished. Taking riskier investments is a personal decision because managers who do so have expectations of incurring high levels of returns. However, if things fail to work out, they want to use government intervention to their advantage to cover up their poor decision making.
