The "too big to fail" policy of the Fed, whereby some banks are bailed out if they are in danger of failing because they are too big and could bring the system down, leads to which of the following problems?
A) Adverse selection
B) Externalities
C) Moral hazard
D) Public goods

Question

Quizplus · Accepted Answer

The "too big to fail" policy creates a moral hazard, where banks know they will be bailed out if in danger of failing, leading to potentially reckless behavior and further risks to the financial system.

The "Too Big to Fail" Policy of the Fed, Whereby