In the context of financial markets, 'Adverse Selection' before a loan is made refers to:
A. Only the problem of monitoring after the loan
B. Borrowers becoming riskier after receiving loans
C. Lenders always having perfect information
D. Borrowers with higher risk being more likely to seek loans
Answer: Option D
Solution (By JKSSB Mock Tests)
Adverse selection in credit markets occurs when higher-risk borrowers are more eager to borrow at any given interest rate, so that the pool of applicants becomes riskier as the interest rate rises.
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