Which of the following statements is most correct?
A)the higher the deposit insurance limit the lower the risk of moral hazard.
B)the higher the deposit insurance limit the greater the risk of moral hazard.
C)deposit insurance limits do not impact moral hazard, they impact adverse selection.
D)increasing the deposit insurance limits above $100,000 would increase coverage for over 50 percent of all depositors.

Question

Quizplus · Accepted Answer

This is because a higher deposit insurance limit gives depositors less incentive to monitor their bank's risk-taking behavior, increasing the likelihood that bank managers will take on excessive risks. Furthermore, a higher limit can also lead to depositors preferring to deposit their money in riskier banks because they know they are protected. This is known as moral hazard.

Which of the Following Statements Is Most Correct