Question

If adverse selection and moral hazard increase, how does this affect the ability of monetary policy to address economic downturns?

Short answer

Business and investing behavior are both influenced by moral hazards.

Step-by-step solution

Concept Introduction.

The financial downswing is described as a broad stoppage of business activities in a certain area over a longer length of time.

Explanation of solution.

Central banks find it tough to boost growth during downturns. As per the financial perspective, moral hazard has a negative impact on investment behavior as well as the ecosystem. During economic downturns, the challenge of asymmetric data grows, implying that monetary policy should be strengthened to counteract the restricting effects of moral hazard and adverse selection hazard.