Governments are often forced to bail out large banks to prevent entire economies from being affected adversely.This provision often encourages banks to invest in risky assets.This is an example of ________.
A) moral hazard
B) a positive externality
C) adverse selection
D) anchoring

Question

Quizplus · Accepted Answer

Moral hazard refers to a situation where a person or organization takes risks knowing that someone else will bear the cost of any negative outcomes. In this case, the provision of government bailouts to large banks creates a moral hazard because the banks are more likely to take risks with their investments, knowing that if they fail, the government will step in to prevent the entire economy from being affected adversely.

Governments Are Often Forced to Bail Out Large Banks to Prevent