If a lender faces a potential loan applicant pool made up of equal amounts of low risks and high risks, will charging an average interest rate provide the average (expected) return? Explain.
What will be an ideal response?
No, the lender will suffer adverse selection. The average interest rate is seen as a high rate by the good risks who will seek a more favorable rate elsewhere. The average rate will appear very attractive to the high-risk applicants who will seek this lender. As a result, the lender will not get the average mix but one skewed heavily toward high risks.
You might also like to view...
The above table shows answers given by people interviewed in the Current Population Survey. Which people are structurally unemployed?
A) A, B, C, and D B) A, B, and C C) B and C. D) A, B, and D
Which of the following is not reflected in the constant term associated with the marginal propensity to consume?
A) The level of C if Y were zero B) People's consumption with zero income C) All other influences on consumption besides income D) All of the above are reflected in the constant term.
A voter will tend to be more informed if the issue in question
A) affects everyone very little. B) is complicated and difficult to understand. C) has an intense and a direct effect on the voter. D) is of special interest to a small group to which the voter does not belong.
Which of the following is not a result of a higher federal budget deficit?
A) a higher real interest rate B) an appreciation of the currency C) a rise in exports D) a fall in the price of foreign inputs