If Congress decreases the amount of government insurance on bank deposits, then this action would
A) create a moral hazard problem in banking.
B) reduce a moral hazard problem in banking.
C) create an adverse selection problem in banking.
D) reduce an adverse selection problem in banking.

Question

Quizplus · Accepted Answer

Decreasing the amount of government insurance on bank deposits would reduce the moral hazard problem in banking. Moral hazard occurs when banks take on riskier investments because they know the government will bail them out if they fail. By decreasing the amount of government insurance, banks would face more risk and would be less likely to engage in risky behavior.

If Congress Decreases the Amount of Government Insurance on Bank