Question

In response to the financial crisis that began in 2007, the government began to bail out banks deemed "too big to fail." Critics of this action argued that this would create the prospect of future bailouts and encourage banks to be fiscally irresponsible in the future. This illustrates

Answer 1

Answer:

The moral hazard problem

Explanation:

Moral hazard problem is defined as a situation where a party gets involved in a risky venture knowing that another party will incur the cost of failure.

For example if a borrower knows that he can take borrowed funds and default easily, he will tend to not pay back because the lender will bear the loss.

During the the financial crisis that began in 2007, the government began to bail out banks deemed "too big to fail."

This created fiscal irresponsibility in banks that knew if they are at risk of failing they will be bailed out by the government.