Economics • Economic BasicsMedium
Which of the following describes 'Moral Hazard' in principal-agent relationships?
A. The tendency of one party to enter into a transaction with hidden pre-existing characteristics unfavorable to the other party
B. The risk that a party insulated from risk may behave differently than it would if it were fully exposed to the risk✓ Correct Answer
C. The deliberate misrepresentation of financial statements by corporate executives to mislead shareholders
D. The refusal of lenders to extend credit to borrowers belonging to specific demographic categories
💡 Solution & Explanation
Moral hazard describes the behavioral change where an economic agent takes on heightened risk because they are insulated from the potential negative consequences, commonly observed in insurance markets after a policy is finalized. Adverse selection, by contrast, refers to asymmetric information problems occurring before a transaction when risky participants are more likely to seek coverage.
More Economics Economic Basics questions
- What does the 'Kinked Demand Curve' model help explain in industrial economics?
- Which type of unemployment occurs when individuals are temporarily between jobs, transitioning from one…
- Examine the mechanics of the 'IS-LM Model' in Keynesian macroeconomics. What does the LM curve represent, and…
- What does the 'Quantity Theory of Money', expressed by Irving Fisher's equation of exchange (MV = PT),…
- Which macroeconomic indicator is most effectively utilized by the Directorate of Economics and Statistics of…