18-10. Identify which of the following situations currentlyfaced by the World Bank or the InternationalMonetary Fund are examples of adverse selectionand which are examples of moral hazard. (Seepages 420–424.)a. The World Bank has extended loans to the governmentof a developing country to financeconstruction of a canal with a certain future flowof earnings. Now, however, the government hasdecided to redirect those funds to build a casinothat may or may not generate sufficient profitsto allow the government to repay the loan.b. The IMF is considering extending loans to severalnations that failed to fully repay loans theyreceived from the IMF during the past decadebut now claim to be better credit risks. Now theIMF is not sure in advance which of thesenations are unlikely to fully repay new loans.c. The IMF recently extended a loan to a governmentdirected by democratically elected officialsthat would permit the nation to adjust to anabrupt reduction in private flows of funds fromabroad. A coup has just occurred, however, inresponse to newly discovered corruption withinthe government’s elected leadership. The newmilitary dictator has announced tentative plansto disburse some of the funds in equal shares toall citizens.
This question was answered on: May 23, 2022
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