Question

Which of the following, if any, constitute moral hazard? (check all that apply) a) Purchases of...

Which of the following, if any, constitute moral hazard?

(check all that apply)

a) Purchases of securities by the Fed

b) Accepting higher risk on the promise that another party will pay

c) Possibility of the other party not following through on their contractual obligation

d) none

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Answer #1

Answer

b) Accepting higher risk on the promise that another party will pay.

c)Possibility of the other party not following through on their contractual obligation

Moral hazard

Moral hazard is the risk that a party has not entered into a contract in good faith or has provided misleading information about its assets, liabilities, or credit capacity. In addition, moral hazard also may mean a party has an incentive to take unusual risks in a desperate attempt to earn a profit before the contract settles.

So if one party accept the unusual risk because another part will pay the sum can be consider as Moral hazard and at the same time of there is any possibility of the other party is not following the contractual obligation then it can also considered as the moral hazard.

ThankYou.....

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