If a government requires domestic banks to lend to certain industries, creating a situation in which the firms know they will receive funding no matter how they use the funds, then the government has created a problem called:
A) structural moral hazard.
B) herding behavior.
C) contagion.
D) regulatory arbitrage.

Question

Quizplus · Accepted Answer

By requiring banks to lend to certain industries regardless of their financial health or creditworthiness, the government is creating a situation in which these firms have little incentive to use the funds responsibly or to improve their operations in order to attract financing from private investors. This is known as structural moral hazard, as the government's policy is incentivizing risky behavior and could ultimately lead to financial instability.

If a Government Requires Domestic Banks to Lend to Certain