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The world bank or the international monetary fund

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Identify which of the following situations currently faced by the World Bank or the International Monetary Fund are examples of adverse selection and which are examples of moral hazard.

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.

Reference no: EM13936736

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