Moral hazard
Moral hazard occurs when a safety net encourages riskier behaviour. Banks that expect a government rescue take bigger risks than they otherwise would.
Real World
Prior to 2008, Lehman Brothers took on extreme leverage knowing that banks of its size had historically been rescued; when the US government chose not to bail it out, its collapse triggered a global crisis.
Exam Focus
For 'evaluate' questions on moral hazard, weigh the cost of excessive risk-taking against the cost of systemic collapse if no guarantee existed.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
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