daretodream wrote:Bank depositors in the US are all financially protected against bank failure because the govenment insures all individuals' bank deposits. An economist argues that this insurance is partly reponsible for the the high rate of bank failure, since it removes from depositors any financial incentive to find out whether the bank that holds their money is secure against failure. If depositors were more selective, then banks would need to be secure in order to compete for depositors' money.

The economist's argument makes which of the following assumption?

The main conclusion is that the depositers are relaxed because they know that their bank deposits are insured and hence they dont bother to find out on their own if the bank is secure against failure.

However the author assumes that the depositers have all the tools to find out if their bank is secure against failure. Lets see which answer choice points out to this assumption.

1. Bank failures are caused when big borrowers default on loan repayments.
Incorrect : Cause of a bank's failure is irrelevant here.

2. A significant proportion of depositors maintain accounts at several different banks
Incorrect : Lets say i have accounts in bank x n bank y. would the failure of bank x or bank y wont effect me just because i have account in 2 banks? Eliminated.

3. The more a depositor has to deposit, the more carefully he or she tends to be in selecting a bank
Incorrect : weakens the argument by stating that depositers are more selective.

4. The difference in the interest rates paid to depositors by different banks is not a significant factor in bank failures.
Incorrect : We cannot assume this from the stimulus above.

5. Potential depositors are able to determine which banks are secure against failure.
Correct : If we negate this answer choice (potential depositers are NOT able to determine which banks are secure against failure) the argument would fall apart.

daretodream wrote:Bank depositors in the US are all financially protected against bank failure because the govenment insures all individuals' bank deposits. An economist argues that this insurance is partly reponsible for the the high rate of bank failure, since it removes from depositors any financial incentive to find out whether the bank that holds their money is secure against failure. If depositors were more selective, then banks would need to be secure in order to compete for depositors' money.

The economist's argument makes which of the following assumption?

1. Bank failures are caused when big borrowers default on loan repayments.
2. A significant proportion of depositors maintain accounts at several different banks
3. The more a depositor has to deposit, the more carefully he or she tends to be in selecting a bank
4. The difference in the interest rates paid to depositors by different banks is not a significant factor in bank failures.
5. Potential depositors are able to determine which banks are secure against failure.