The Moral Hazard Problem Is Minimized When Deposit Insurance Premiums

question 18

Multiple Choice

The moral hazard problem is minimized when deposit insurance premiums are

• A) zero (not imposed by the FDIC).
• B) the same percentage of deposits for all banks.
• C) set at a fixed percentage of deposits for large banks, and at zero for small banks.
• D) set at a percentage of deposits that is based on the bank's risk.

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Definitions:

Opportunity Cost

The cost of foregone alternatives, representing the benefits that could have been received by choosing the next best alternative.

Subjective Values

The personal importance or worth that an individual places on a good or service, which can vary greatly between people.

Time Costs

The opportunity costs associated with the time spent on an activity instead of other, potentially more valuable, activities.

Transaction Costs

Expenses incurred in making an economic exchange, including search, bargaining, and enforcement of contracts.