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Policies & Prospects

For each of the following situations explain which of the policy issues is associated with stance the institution has taken.

A)The IMF extends a long-term loan to a nations government to help it maintain publicly supported production of goods and services that the government otherwise would have turned over to private companies.

Moral hazard
Adverse selection
Making loans that would be otherwise funded in the private market
High level of corruption makes loans have little chance of success

B) the world bank makes a loan to companies in an impoverished nation in which government officials typically demand bribes equal to 50% of companies' profits before allowing them to engage in any new investment project.

Moral hazard
Adverse selection
Making loans that would be otherwise funded in the private market
High level of corruption makes loans have little chance of success

C)The IMF offers to make a loan to banks in a country in which the government's rulers commonly require banks to extend credit to finance high risk investment projects headed by the rulers' friends & relatives.

Moral hazard
Adverse selection
Making loans that would be otherwise funded in the private market
High level of corruption makes loans have little chance of success

Solution Preview

A. These loans would otherwise have been funded in a private market.

B. This situation involves adverse selection. When bribes are required, only ...

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