One of the serious drawbacks of the deposit insurance system instituted in the United States is that:
A) bank failures continue to occur regularly.
B) the system took away the Federal Reserve's ability to conduct open-market operations.
C) the system took away the Federal Reserve's ability to change reserve requirements.
D) if insured intermediaries make bad loans, the taxpayers may be responsible for covering the losses.

Question

Quizplus · Accepted Answer

The deposit insurance system in the United States provides protection to depositors in case of bank failures. However, if insured intermediaries such as banks make bad loans or engage in risky behavior, the losses may still have to be covered by taxpayers. This creates a moral hazard problem, where banks have less incentive to make safe and responsible lending decisions knowing that their losses will be covered by insurance.

One of the Serious Drawbacks of the Deposit Insurance System