Question : 11) Moral hazard an important concern of insurance arrangements because : 1373726

11) Moral hazard is an important concern of insurance arrangements because the existence of insurance

A) provides increased incentives for risk taking.

B) is a hindrance to efficient risk taking.

C) causes the private cost of the insured activity to increase.

D) creates an adverse selection problem but no moral hazard problem.

12) When bad drivers line up to purchase collision insurance, automobile insurers are subject to the

A) moral hazard problem.

B) adverse selection problem.

C) assigned risk problem.

D) ill queue problem.

13) Deposit insurance is only one type of government safety net.  All of the following are types of government support for troubled financial institutions except

A) forgiving tax debt.

B) lending from the central bank.

C) lending directly from the government’s treasury department.

D) nationalizing and guaranteeing that all creditors will be repaid their loans in full.

14) Although the FDIC was created to prevent bank failures, its existence encourages banks to

A) take too much risk.

B) hold too much capital.

C) open too many branches.

D) buy too much stock.

15) A system of deposit insurance

A) attracts risk-taking entrepreneurs into the banking industry.

B) encourages bank managers to decrease risk.

C) increases the incentives of depositors to monitor the riskiness of their bank’s asset portfolio.

D) increases the likelihood of bank runs.

16) The government safety net creates ________ problem because risk-loving entrepreneurs might find banking an attractive industry.

A) an adverse selection

B) a moral hazard

C) a lemons

D) a revenue

17) Since depositors, like any lender, only receive fixed payments while the bank keeps any surplus profits, they face the ________ problem that banks may take on too ________ risk.

A) adverse selection; little

B) adverse selection; much

C) moral hazard; little

D) moral hazard; much

18) Acquiring information on a bank’s activities in order to determine a bank’s risk is difficult for depositors and is another argument for government ________.

A) regulation

B) ownership

C) recall

D) forbearance

19) The existence of deposit insurance can increase the likelihood that depositors will need deposit protection, as banks with deposit insurance

A) are likely to take on greater risks than they otherwise would.

B) are likely to be too conservative, reducing the probability of turning a profit.

C) are likely to regard deposits as an unattractive source of funds due to depositors’ demands for safety.

D) are placed at a competitive disadvantage in acquiring funds.

20) In May 1991, the FDIC announced that it would sell the government’s final 26% stake in Continental Illinois, ending government ownership of the bank that it had rescued in 1984. The FDIC took control of the bank, rather than liquidate it, because it believed that Continental Illinois

A) was a good investment opportunity for the government.

B) could be the Chicago branch of a new governmentally-owned interstate banking system.

C) was too big to fail.

D) would become the center of the new midwest region central bank system.