Question

Suppose Kate comes into a large sum of money and decides to lend it out to earn interest on it. Because she lacks the expertise to evaluate the credit risks of potential borrowers. she decides to deposit the money in her local bank, a financial intermediary. This is an example of how financial intermediaries can help solve the problem of:

Answer 1

Adverse Selection

Step-by-step explanation:

Adverse Selection is a situation where a seller has more information about a product. It is caused when a party in a transaction does not have enough information that can enable him make a good investment. Financial intermediaries like banks can help in solving this problem as they have more knowledge of finances and can more accurately determine the credit worthiness of a potential borrower. So, before a loan can be processed, they can accurately determine if the borrower can repay.

Kate will find the financial intermediaries useful in her situation as they would be able to evaluate the credit risks of her potential borrowers.