A moral hazard problem associated with Federal Deposit Insurance Corporation (FDIC) deposit guarantees is that such insurance is likely to:
A. Decrease incentives of depositors to monitor the financial strength of banks.
B. Increase the risk of depositors.
C. Increase risk-taking behavior on the part ofbanks.
D. Be unavailable for low income depositors.
Answer:C
The moral hazard problem refers to the fact that banks have more incentives to take on additional risk, because the FDIC effectively subsidizes losses due to the increased risk.