In response to the 2008 financial crisis, 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

Question

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The moral hazard problem occurs when one party takes more risks because they know another party bears the cost of those risks. In this case, banks might engage in riskier behavior knowing they would likely be bailed out by the government, which is a classic example of moral hazard.

In Response to the 2008 Financial Crisis, the Government Began