Since depositors,like any lender,only receive fixed payments while the bank keeps any surplus profits,they face the ________ problem that banks may take on too ________ risk.
A)adverse selection;little
B)adverse selection;much
C)moral hazard;little
D)moral hazard;much

Question

Quizplus · Accepted Answer

This is a moral hazard problem where depositors do not have incentives to monitor banks and banks may take on too much risk, knowing they will not bear the full cost of losses. Option A) is incorrect because adverse selection refers to situations where one party has more information than the other party, which is not the case here. Option B) is incorrect because the problem is not that banks take too little risk. Option C) is incorrect because moral hazard problem arises when one party takes risks because they are insured against the costs of any losses, which is the case here.

Since Depositors,like Any Lender,only Receive Fixed Payments While the Bank