The U.S Federal Reserve (Fed) acts as a lender of last resort to commercial banks, meaning that that the Fed will bail out the banks when they encounter financial problems. It is often argued that this leads the banks to take on additional risks and therefore creates the problem of:

Question

Quizplus · Accepted Answer

The Fed's role as a lender of last resort creates moral hazard, as banks may take on excessive risk knowing that they will be bailed out if they encounter financial problems.

The US Federal Reserve (Fed) Acts as a Lender of Last