The concept of moral hazard was publicly discussed in the context of the 2007-2008 financial crisis because
A)it was claimed that moral hazard was necessary to prevent large U.S.financial institutions from going bankrupt.
B)it was argued that the U.S.government should invoke moral hazard to sustain the financial sector.
C)it was feared that government bailouts of financial institutions would encourage the institutions to continue their risky behaviour.
D)it was feared that government bailouts of financial institutions would reduce competition in financial markets.
E)it was feared that the U.S.government was taking advantage of its special knowledge in the financial markets.

Question

Quizplus · Accepted Answer

The concept of moral hazard was discussed in the context of the 2007-2008 financial crisis because it was feared that government bailouts of financial institutions would encourage the institutions to continue their risky behaviour. This is the essence of moral hazard - when one party takes on more risk because they know they will be bailed out if things go wrong. The fear was that banks would take on too much risk if they knew the government would bail them out if they failed. Therefore, option C is the correct answer.

The Concept of Moral Hazard Was Publicly Discussed in the Context