If banks knew that they would be bailed out by the government, then they would have less of an incentive to pursue prudential lending practices. This is known as the problem of ___________.

Question

Quizplus · Accepted Answer

Moral hazard refers to the situation where one party takes more risks because they know another party will bear the cost of those risks. In this case, banks take on more risk because they expect to be bailed out by the government, which can lead to imprudent lending practices.

If Banks Knew That They Would Be Bailed Out by the Government