International investors believe that when a country gets into financial trouble, the IMF will rescue the country, thus reducing the investors' risk.As a result, investors take greater risks than they would otherwise.This is an example of

Question

Quizplus · Accepted Answer

The scenario presented here is an example of moral hazard. It occurs when a party takes additional risks knowing that they will not bear the full consequences of those risks. In this case, investors know that the IMF will likely bail out a country in financial trouble, so they take greater risks than they would if the possibility of a bailout didn't exist.

International Investors Believe That When a Country Gets into Financial