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

The higher the deposit insurance limit, the greater the risk of moral hazard, as it reduces the incentive for depositors to exercise caution when selecting a bank to deposit their money. The higher the insurance limit, the less risk depositors perceive, and the more likely they are to choose a riskier bank. This can lead to banks taking on more risk, knowing that the insurance will cover losses if they fail.

Which of the Following Statements Is Most Correct