Depositors do not check their banks carefully for stability anymore, because of the Federal deposit insurance program. This illustrates the problem of:
A) Adverse selection
B) Externalities
C) Moral hazard
D) Public goods

Question

Quizplus · Accepted Answer

The situation described in the scenario is an example of moral hazard. When depositors know that their deposits are insured by the federal government, they may not carefully check whether their bank is financially stable or not. This is because they are not worried about losing their money if the bank fails. As a result, the bank may take on more risk than it otherwise would have, knowing that it won't be punished for failure. This is a clear example of moral hazard.

Depositors Do Not Check Their Banks Carefully for Stability Anymore