The trade-off faced by a goldsmith when deciding to print more receipts than the amount of gold available is
A)between insolvency risk and interest rate risk
B)between profitability and interest rate risk
C)between interest rate risk and credit risk
D)between profitability and credit risk
E)between profitability and insolvency risk

Question

Quizplus · Accepted Answer

The trade-off for a goldsmith in printing more receipts than the amount of gold available is between profitability and insolvency risk. By issuing more receipts, the goldsmith can lend more and potentially earn more interest (increasing profitability), but this also increases the risk of not being able to meet withdrawal demands if too many receipt holders demand their gold at once, leading to insolvency.

The Trade-Off Faced by a Goldsmith When Deciding to Print