Question: A country s central bank e g the Bank of England or
A country’s central bank (e.g. the Bank of England or the US Federal Reserve Bank) has a key role in ensuring the stability of the banking system. In many countries the central bank is prepared to bail banks out which find themselves in financial difficulties. Although this has the benefit of reducing the chance of banks going bankrupt and depositors losing their money, it can create a moral hazard. Explain why.
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