By rescuing large,troubled institutions,as happened during the Great Recession with institutions like AIG and General Motors,policymakers attempted to achieve financial and economic stability in the short run,but their actions may encourage even riskier behaviour on the part of these large institutions in the future if these institutions believe that they,too,will be bailed out if they get in trouble.This risk faced by policymakers is known as
A) asymmetric information.
B) quantitative easing.
C) too-big-to-fail policy.
D) moral hazard.

Question

Quizplus · Accepted Answer

Moral hazard is the risk faced by policymakers that their actions of rescuing large troubled institutions may encourage even riskier behavior on the part of these institutions in the future if these institutions believe that they, too, will be bailed out if they get in trouble. Asymmetric information refers to the situation when one party to a transaction has more information than another party. Quantitative easing is a monetary policy used by central banks to increase the money supply and stimulate economic growth. Too-big-to-fail policy is a government policy that offers support to big corporations or financial institutions to prevent their failure, which could have severe economic consequences. However, this policy may lead to moral hazard.

By Rescuing Large,troubled Institutions,as Happened During the Great Recession with Institutions