Depositors do not check their banks carefully for stability anymore, because of the federal deposit insurance program. This illustrates the problem of
A) adverse selection.
B) externalities.
C) moral hazard.
D) public goods.

Question

Quizplus · Accepted Answer

Moral hazard occurs when one party takes more risks because they know another party will bear the cost of those risks. In this case, depositors are less likely to check their bank's stability because they know the federal deposit insurance program will protect their deposits up to a certain amount. This leads to banks taking on more risks than they would if depositors were more cautious, which could ultimately lead to instability in the banking system.

Depositors Do Not Check Their Banks Carefully for Stability Anymore