Government-sponsored deposit insurance typically encourages individual depositors to monitor their banks' behavior in accepting risk.

Question

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Government-sponsored deposit insurance may actually reduce incentives for individual depositors to monitor their banks' behavior in accepting risk because the government guarantees the safety of deposits up to a certain amount, regardless of the bank's risk-taking behavior. This can lead to moral hazard, where banks may take on excessive risk knowing that the government will ultimately bear the cost if things go wrong.

Government-Sponsored Deposit Insurance Typically Encourages Individual Depositors to Monitor Their