The government's providing of deposit insurance and functioning as the lender of last resort has significantly:
A) decreased the incentive for bank managers to take on risk.
B) increased the amount of regulation of banks required, but has had no effect on bank's incentive to take on risk.
C) increased the incentive for banks to take on risk, but has had no effect on the amount of regulation of banks required.
D) increased the amount of regulation of banks required and increased the incentive for banks to take on risk.

Question

Quizplus · Accepted Answer

Deposit insurance and the government acting as a lender of last resort can lead to moral hazard, where banks might take on more risk knowing they have a safety net. This, in turn, necessitates increased regulation to mitigate the risk-taking behavior.

The Government's Providing of Deposit Insurance and Functioning as the Lender