Part 1Gustavo is a young doctor who lives in a country with a relatively inefficient legal and financial system. When Gustavo applied for a mortgage, he found that banks usually required collateral for up to 300% of the amount of the loan. Part 2Why might banks require that much collateral in a financial system like Gustavo's country? A. An inefficient legal system implies strong property rights, and under such a strong system, collateral is more highly valued and hence more desirable. B. An inefficient legal system implies weak property rights but also high property values, making collateral more highly valued and hence more desirable. C. An inefficient legal system implies weak property rights, and collateral helps banks recoup some of their loan if the borrower defaults. Your answer is correct.D. An inefficient legal system implies strong property rights, and collateral helps banks recoup some of their loan if the borrower defaults. Part 3As a result, when compared to other countries, we would expect Gustavo's nation to have: A. more investment and slower economic growth. B. more investment and faster economic growth. C. less investment and faster economic growth. D. less investment and slower economic growth.

Question

Part 1Gustavo is a young doctor who lives in a country with a relatively inefficient legal and financial system. When Gustavo applied for a​ mortgage, he found that banks usually required collateral for up to​ 300% of the amount of the loan. Part 2Why might banks require that much collateral in a financial system like​ Gustavo's country? A. An inefficient legal system implies strong property​ rights, and under such a strong​ system, collateral is more highly valued and hence more desirable. B. An inefficient legal system implies weak property rights but also high property​ values, making collateral more highly valued and hence more desirable. C. An inefficient legal system implies weak property​ rights, and collateral helps banks recoup some of their loan if the borrower defaults. Your answer is correct.D. An inefficient legal system implies strong property​ rights, and collateral helps banks recoup some of their loan if the borrower defaults. Part 3As a​ result, when compared to other​ countries, we would expect​ Gustavo's nation to​ have: A. more investment and slower economic growth. B. more investment and faster economic growth. C. less investment and faster economic growth. D. less investment and slower economic growth.

BlackTom AI · Accepted Answer

We begin by restating the question and the given answer options to ensure clarity about what is being evaluated.
Question part 2 asks why banks might require very high collateral in Gustavo's country, with four options A–D. The correct-appearing reasoning hinges on the relationship between a country’s legal/property-right environment and lending practices, especially collateral use as a risk-management tool when property rights are weak.
Option A: 'An inefficient legal system implies strong property rights, and under such a strong system, collateral is more highly valued and hence more desirable.' This is inconsistent. If the legal system is inefficient, it does not typically imply strong property rights; rather, it suggests uncertain or weak enforcement. Therefore, the premise that strong property rights exist is unlikely, and the claim that collateral would be more desirable under strong rights does not fit the given context of inefficiency.
Option B: 'An inefficient legal system implies weak property rights but also high property values, making collateral more highly valued and hence more desirable.' Here, the idea of high property values is introduced, but it contradicts the common correlation that weak property rights under an inefficient system tend to depress or misuse property values, not inflate them consistently. The combination of weak rights with high values as the driver for collateral desirability is not the standard rationale used in financial risk management in such settings.
Option C: 'An inefficient legal system implies weak property rights, and collateral helps banks recoup some of their loan if the borrower defaults.' This aligns with the standard financial logic: when enforcement of contracts and property-right protection is weak, banks face higher risk of loan losses if borrowers default, so requiring collateral serves as a tangible claim to recover funds. Collateral mitigates the averse selection and moral hazard problems that arise when legal remedies are weak.
Option D: 'An inefficient legal system implies strong property rights, and collateral helps banks recoup some of their loan if the borrower defaults.' This option is internally contradictory: if the system is inefficient, it is unlikely to imply strong property rights. The combination of strong rights with inefficiency does not coherently fit the described environment, and thus the rationale for heavy collateral is not supported by standard theory in this context.
A useful way to think about this is: in markets with weak legal enforcement, lenders shift risk by demanding collateral, which provides a relatively safer claim on assets and partially substitutes for reliable legal recourse. This explains why collateral levels might be exceptionally high in Gustavo’s country. The incorrect choices either misstate the relationship between inefficiency and property rights or rely on assumptions about property values that do not follow from the described institutional environment.
In sum, evaluating the reasoning behind each option shows that the core mechanism driving heavy collateral is the protection against default losses when legal remedies are weak, which is captured by option C, while the others either mischaracterize property rights, value, or the implied causal link between inefficiency and collateral demand.

类似问题

Why might some governments provide limited or no property rights to their citizens?

Why might some governments provide limited or no property rights to their citizens?

Match each of the left-hand examples to a dimension of property rights.

Countries without enforced property rights will have an increase in domestic investments and foreign investments.

Countries without enforced property rights will have an increase in domestic investments and foreign investments.

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