/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} Q.33 The term 鈥渕oral hazard鈥� desc... [FREE SOLUTION] | 91影视

91影视

Log out

Learning Materials

Features

Discover

Chapter 15: Q.33 (page 379)

The term 鈥渕oral hazard鈥� describes increases in risky behavior resulting from efforts to make that behavior safer. How does the concept of moral hazard apply to deposit insurance and other bank regulations?

Short Answer

Expert verified

In the case of deposit insurance, ethical risk directs insured firms' desire for increased risk-taking, which might occur when depositors and various creditors are鈥攐r believe they are鈥攑rotected from failures.

Step by step solution

01

Step 1:Concept Introduction

The whole point of Deposit Insurance is to control bank runs, thus causing the banking system securer.

02

Issues

The problem arises when a bank learns that deposit insurance must protect all of its deposits if the bank is unable to do so. As a result, the bank may be tempted to take far higher risks than it would have taken if deposit insurance had not been in existence.

03

Explanation

This suggests that deposit insurance, even if characterised as a safety net in the event of a bank's failure, might make the financial system less secure by forcing institutions to take more risky actions.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Bank runs are often described as "self-fulfilling prophecies." Why is this phrase appropriate to bank runs?

Why might banks want to hold excess reserves in time of recession?

Define the velocity of the money supply.

A well-known economic model called the Phillips Curve (discussed in The Keynesian Perspective chapter) describes the short-run tradeoff typically observed between inflation and unemployment. Based

on the discussion of expansionary and contractionary monetary policy, explain why one of these variables usually falls when the other rises.

How might each of the following factors complicate the implementation of monetary policy: long and variable lags, excess reserves, and movements in velocity?
See all solutions

Recommended explanations on Economics Textbooks

Taxation Economics

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.