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(Solved by Expert Tutors) 18-10. Identify which of the following situations currently faced by th


Monetary Fund are examples of adverse selection

and which are examples of moral hazard. (See

pages 420?424.)


a. The World Bank has extended loans to the government

of a developing country to finance

construction of a canal with a certain future flow

of earnings. Now, however, the government has

decided to redirect those funds to build a casino

that may or may not generate sufficient profits

to allow the government to repay the loan.


b. The IMF is considering extending loans to several

nations that failed to fully repay loans they

received from the IMF during the past decade

but now claim to be better credit risks. Now the

IMF is not sure in advance which of these

nations are unlikely to fully repay new loans.


c. The IMF recently extended a loan to a government

directed by democratically elected officials

that would permit the nation to adjust to an

abrupt reduction in private flows of funds from

abroad. A coup has just occurred, however, in

response to newly discovered corruption within

the government?s elected leadership. The new

military dictator has announced tentative plans

to disburse some of the funds in equal shares to

all citizens.

 


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DATE ANSWERED

Apr 19, 2020

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