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The Role of Collateral in Low-Trust Lending
Imagine two small business owners, Alex and Ben, who both need a loan to expand their operations. They approach a lender in a community where, due to a recent economic downturn and several high-profile defaults, general trust in borrowers is very low. Alex is able to offer the deed to a commercial property he owns as security for the loan, while Ben has no significant assets to offer. Analyze the likely outcomes for both Alex and Ben. In your analysis, explain the relationship between the lender's trust, the risk involved, and the function of the property deed in this transaction.
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The Role of Collateral in Low-Trust Lending
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Evaluating a Policy to Restore Lending Trust
A government is concerned about a widespread lack of lending in its economy, which has been traced to a breakdown of trust between financial institutions and potential borrowers. To remedy this, several policies are proposed. Which of the following policies would be the least effective at addressing the fundamental problem?