Suppose Cho comes into a large sum of money and decides to lend it out to
earn interest on it. She realizes, however, that even if she could evaluate
whether a borrower is creditworthy before making a loan, she cannot ensure that
her borrower will use the money as promised. She therefore deposits her money
in a local bank, a financial intermediary. Because financial intermediaries can
track customers' uses of money more easily than Cho can and take action
quickly in cases where borrowers use the money irresponsibly, this is an
example of how financial intermediaries can help solve the problem of:.
A. Moral hazard.
B. Insolvency.
C. Adverse selection.

C. Adverse selection.

Explanation:

Adverse selection occurs when the participants in a economic transaction do not have the same amount of information about each other: either the buyer has more information than the seller, or the seller has more information than the buyer.

In the question, we have an example of adverse selection because Cho does not have enough information about the buyers (the borrowers), and she does not have a good way to obtain that information.

For that reason, she decides to give the money to the bank, an institution with much more capacity and information about the borrowers. Like this, she is solving the problem of adverse selection.

answertop managers;