Part 1In 2008, as a financial crisis began to unfold in the United States, the FDIC raised the limit on insured losses to bank depositors from $100,000 per account to $250,000 per account. How would this help stabilize the financial system? A. It would attract new foreign depositors and rapidly increase the cash amounts available to banks. B. It would reassure depositors that their money was safe in banks and prevent a possible bank panic. C. It would decrease banks' reserve requirements and thus increase their available assets. D. It would enable banks to lower interest rates (as money is more safe) and decrease future interest payments.

Question

Part 1In​ 2008, as a financial crisis began to unfold in the United​ States, the FDIC raised the limit on insured losses to bank depositors from​ $100,000 per account to​ $250,000 per account. How would this help stabilize the financial​ system? A. It would attract new foreign depositors and rapidly increase the cash amounts available to banks. B. It would reassure depositors that their money was safe in banks and prevent a possible bank panic. C. It would decrease​ banks' reserve requirements and thus increase their available assets. D. It would enable banks to lower interest rates​ (as money is more​ safe) and decrease future interest payments.

BlackTom AI · Accepted Answer

Let's evaluate what the question is asking: how the FDIC's increase of the insured deposits limit would affect financial stability during the 2008 crisis.
Option A: It would attract new foreign depositors and rapidly increase the cash amounts available to banks. While higher insured limits might influence some deposit flows, the primary goal in a crisis is not to attract foreign deposits or massively boost bank cash reserves, but to reduce panic and preserve confidence. This makes A an unlikely mechanism for stabilization.
Option B: It would reassure depositors that their money was safe in banks and prevent a possible bank panic. This aligns with the core purpose of deposit insurance: to maintain confidence in the banking system so that depositors do not withdraw funds en masse, which can trigger or worsen bank runs. By increasing the insured limit, more deposits are protected, reducing the fear of losing uninsured funds and thereby stabilizing the system. This is a central, well-supported rationale.
Option C: It would decrease banks' reserve requirements and thus increase their available assets. Deposit insurance limits do not directly affect reserve requirements set by monetary authorities. Reserve requirements pertain to how much banks must hold in reserve, not to insurance coverage for deposits. Therefore, this statement misstates the relationship between insurance limits and reserves.
Option D: It would enable banks to lower interest rates (as money is more safe) and decrease future interest payments. While depositor confidence can influence funding costs, simply raising insured limits does not compel banks to lower interest rates or automatically reduce future interest obligations. Interest rates are driven by broader market conditions, policy rates, and risk assessments, not solely by insurance coverage levels. Hence this option is incorrect.
In summary, B directly captures the stabilizing effect of expanded deposit insurance—reducing panic and reinforcing confidence—while A, C, and D describe effects that are not aligned with how deposit insurance primarily functions or with the mechanics of monetary policy during a crisis.

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Homework:Chapter 2 Homework

View Explanation

Log in for full answers

Similar Questions

Risk-based deposit insurance premiums help control moral hazard by:

Which of the following outcomes is most directly attributable to the absence of a fully mutualised European Deposit Insurance Scheme (EDIS)?

A key reason full European Deposit Insurance Scheme has faced political resistance is that:

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What is the drawback of deposit insurance facility?

Financial consolidation of banks with other financial services in recent years poses government safety net problems. The safety net intended for depository institutions may be

More Practical Tools for Students Powered by AI Study Helper

Making Your Study Simpler

Part 1Consider a failing bank. If the FDIC uses the payoff method LOADING... , a deposit of $320,000320,000 is worth a minimum of $[input]enter your response here . (Round your response to the nearest whole number.)