Question

1) Of the following sources of external finance for American nonfinancial businesses, the least important in terms of raising new funds is A) loans from banks. B) stocks. C) bonds and commercial paper. D) loans from other financial intermediaries.

2) The government safety net creates _____ problem because risk-loving entrepreneurs might find banking an attractive industry. A) a moral hazard B) an adverse selection C) a lemons D) a revenue

Answer 1

The least important source in terms of raising new funds is stocks because most of the new funds are financed from loans from the bank and bonds and commercial paper. Select option B stocks.

It should be adverse selection because when government promises to protect the entrepreneurs they indulge in unnecessary risky business. And banking industry should be very attractive for these entrepreneurs which indicates that they self select themselves adversely for the banks. Correct choice is option B.