Question

The "too big to fail" policy of the Fed, whereby some banks are bailed out if they are in danger of failing because they are too big and could bring the system down, leads to which of the following problems?
a.Adverse selection
b.Externalities
c.Moral hazard ---- Ensured against that risk
d.Public goods

Answer 1

Answer:

c.Moral hazard

Explanation:

Moral hazard can occur when banks take on excessive risk more than they would normally take on because they know they would be bailed out if they fail.

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