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 moral hazard, as it incentivizes these large banks to take on excessive risk, knowing that they will be bailed out if they get into trouble. This can lead to further instability in the financial system, as well as unfair treatment of smaller banks that do not receive the same protections.

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