Part 1How could higher deposit insurance premiums for banks with riskier assets benefit the economy?Part 2
A. Risk-based premiums would eliminate the adverse selection problem. Furthermore, since the technology exists to accurately estimate the riskiness of bank assets, implementing this policy could significantly benefit the economy B. Risk-based premiums would help mitigate the moral hazard problem; however, it is difficult to monitor the degree of risk in bank assets because often only the bank making the loans knows how risky they are C. Risk-based premiums would help mitigate the adverse selection problem; however, it is difficult to monitor the degree of risk in bank assets because often only the bank making the loans knows how risky they are D. Risk-based premiums would eliminate the moral hazard problem. Furthermore, since the technology exists to accurately estimate the riskiness of bank assets, implementing this policy could significantly benefit the economy

Question

Part 1How could higher deposit insurance premiums for banks with riskier assets benefit the​ economy?Part 2
A. ​Risk-based premiums would eliminate the adverse selection problem.​ Furthermore, since the technology exists to accurately estimate the riskiness of bank​ assets, implementing this policy could significantly benefit the economy B. ​Risk-based premiums would help mitigate the moral hazard​ problem; however, it is difficult to monitor the degree of risk in bank assets because often only the bank making the loans knows how risky they are C. ​Risk-based premiums would help mitigate the adverse selection​ problem; however, it is difficult to monitor the degree of risk in bank assets because often only the bank making the loans knows how risky they are D. ​Risk-based premiums would eliminate the moral hazard problem.​ Furthermore, since the technology exists to accurately estimate the riskiness of bank​ assets, implementing this policy could significantly benefit the economy

BlackTom AI · Accepted Answer

Question restatement: The prompt asks how higher deposit insurance premiums for banks with riskier assets could benefit the economy, and provides four answer options labeled A–D. The correct choice identified in the data is option B.
Option A: 'Risk-based premiums would eliminate the adverse selection problem. Furthermore, since the technology exists to accurately estimate the riskiness of bank assets, implementing this policy could significantly benefit the economy.' While risk-based premiums can address some information problems, the claim that adverse selection is completely eliminated is overly strong. Banks and investors may still have incentives to misrepresent or conceal risk, and risk estimation is imperfect in practice. Therefore, this option overstates the elimination of adverse selection and overpromises the certainty of accurate risk measurement.
Option B: 'Risk-based premiums would help mitigate the moral hazard problem; however, it is difficult to monitor the degree of risk in bank assets because often only the bank making the loans knows how risky they are.' This option correctly identifies moral hazard as a concern: banks with insured deposits may take on riskier assets since deposits are insured, which can be mitigated by charging higher premiums for riskier assets. It also accurately notes the monitoring challenge: while some risk indicators exist, complete visibility into the true riskiness of loan portfolios is often limited because information is asymmetric between banks and regulators or insurers. Therefore, this option correctly captures both the potential benefit and the practical monitoring difficulty, matching standard economic reasoning on moral hazard and information asymmetry.
Option C: 'Risk-based premiums would help mitigate the adverse selection problem; however, it is difficult to monitor the degree of risk in bank assets because often only the bank making the loans knows how risky they are.' This option correctly highlights the monitoring challenge but incorrectly asserts that risk-based premiums primarily mitigate adverse selection; in the context of deposit insurance, the central concern is moral hazard due to insured deposits, not adverse selection in selecting borrowers. The pairing of adverse selection with the monitoring difficulty makes this choice inconsistent with the main channel described.
Option D: 'Risk-based premiums would eliminate the moral hazard problem. Furthermore, since the technology exists to accurately estimate the riskiness of bank assets, implementing this policy could significantly benefit the economy.' This option claims that moral hazard would be eliminated, which is unrealistic; premiums reduce but do not remove moral hazard entirely. It also assumes perfect or accurate risk measurement, which is not guaranteed in practice. The combination of an unrealistic elimination claim and overconfident risk estimation makes this option incorrect.
In summary, each option presents a nuanced claim about how risk-based premiums interact with adverse selection and moral hazard. Only option B correctly emphasizes that risk-based premiums can address moral hazard but that monitoring the true risk of bank assets remains difficult due to information asymmetries between banks and insurers or regulators, while the other choices overstate the benefits or misidentify the primary information problem.

Homework:Chapter 10 Homework

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