Bank depositors in the United States are all financially protected

Conclusion: insurance is 'partly' responsible for the high rate of bank failures.
Evidence for conclusion: depositors are feeling secure from any bank failure. moreover, if depositors were more selective, Competition would have come into picture.

Pre-thinking - As we said in conclusion, insurance is 'partly' responsible for the high rate of bank failures. and we need to weaken it. What if we look for an option that shows that a high rate of bank failures would persist even in the absence of deposit insurance, not partly but 100%. moreover I think partly word is a trap in this question.

Which of the following, if true, most seriously weakens the economist's argument?

A) Before the government started to insure depositors against bank failure, there was a lower rate of bank failure than there is now.--- Classic causality. Ask yourself, Are you 100% sure this is the reason. Can something else be possible ? even partly ?

B) When the government did not insure deposits, frequent bank failures occurred as a result of depositors' fears of losing money in bank failures. --- so prior to insurance banks used to failure. now it is insured and still failing. clearly it is not affecting the factor that is responsible for failure. in other words insurance is not affecting it even partly.

C) Surveys show that a significant proportion of depositors are aware that their deposits are insured by the government. --- So? irrelevant to conclusion.

D) There is an upper limit on the amount of an individual's deposit that the government will insure, but very few individuals' deposits exceed this limit. looks like you are talking about a case. any how its not at all part of solution.

E) The security of a bank against failure depends on the percentage of its assets that are loaned out and also on how much risk its loans involve. --- irrelevant

I think its a good question given that very good traps are used, otherwise a simple one.

Govt insures bank deposits.

Economist: This insurance is partly responsible for the high rate of bank failures (there are other reasons too),
Depositors have no 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 business.

The economist says that this guarantee given by the Govt is making the depositors lax and that is partly responsible for bank failures because banks are becoming lax.

What weakens his argument that Govt's insurance is causing bank failures?

(A) Before the government started to insure depositors against bank failure, there was a lower rate of bank failure than there is now.

It strengthens the economist's argument.

(B) When the government did not insure deposits, frequent bank failures occurred as a result of depositors' fears of losing money in bank failures.

Correct. If frequent bank failures occurred because of depositor's fear of losing deposits (in this fear they perhaps withdrew at critical times), then Govt's insurance helps take care of this factor. It helps avoid bank failures. Not having Govt's insurance will lead to frequent bank failures. Hence, Govt's insurance is not the reason for bank failures. Note that having Govt's insurance may lead to depositors oversight but without it, the depositors are extremely iffy and that leads to 'frequent' bank failures. So Govt's insurance overall has a positive impact in avoiding bank failures.

(C) Surveys show that a significant proportion of depositors are aware that their deposits are insured by the government.

Agrees with the economist's argument. Depositors are aware and hence don't care much.

(D) There is an upper limit on the amount of an individual's deposit that the government will insure, but very few individuals' deposits exceed this limit.

Again, agrees with the economist's argument. Since people's deposits do not exceed the limit, they feel safe.

(E) The security of a bank against failure depends on the percentage of its assets that are loaned out and also on how much risk its loans involve.

Irrelevant.

Answer (B)
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The assumption version of this question can be found here: bank-depositors-in-the-united-states-are-all-financially-63628.html

Simple weaken question,
A) Before the government started to insure depositors against bank failure, there was a lower rate of bank failure than there is now.--- Information about bank failure at current time point is not available in the argument.. Eliminate.

B) When the government did not insure deposits, frequent bank failures occurred as a result of depositors' fears of losing money in bank failures.---- Correct. Previously, more failure were happened when government not insured the deposits.

C) Surveys show that a significant proportion of depositors are aware that their deposits are insured by the government.--- Not correct.

D) There is an upper limit on the amount of an individual's deposit that the government will insure, but very few individuals' deposits exceed this limit.---- Not make sense.. Does not weaken the argument.

E) The security of a bank against failure depends on the percentage of its assets that are loaned out and also on how much risk its loans involve.---- loan position will not effect much and irrelevant.

Our job is to weaken the economist's argument. His conclusion is: Government insurance is partly responsible for the high rate of bank failures. If this conclusion is true then the addition of government insurance must have caused an increase in bank failures and removing this insurance should result in fewer bank failures.

Answer choice (B) is the best answer. This is the one that suggests that without government insurance, bank failures occurred frequently. It implies that government insurance has reduced the high rate of bank failures.

GMATNinja VeritasPrepKarishma

For solution provided by eliaslatour



If I pay close attention to word partly that means something else is responsible for high rate of bank failures?

Does not (E) fit more correctly?
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the argument is not concerned with things about the banks themselves that make the banks more susceptible to failure; rather, it is concerned with the behavior of the banks' depositors. more like think from your prospective. you are a customer in a bank. Hope you see it though. Ask any specific questions, if needed.

Bank depositors in the United States are all financially protected against bank failure because the government insures all individuals' bank deposits. An economist argues that this insurance is partly responsible for the high rate of bank failures, 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.

Which of the following, if true, most seriously weakens the economist's argument?

(A) Before the government started to insure depositors against bank failure, there was a lower rate of bank failure than there is now.

(B) When the government did not insure deposits, frequent bank failures occurred as a result of depositors' fears of losing money in bank failures.

(C) Surveys show that a significant proportion of depositors are aware that their deposits are insured by the government.

(D) There is an upper limit on the amount of an individual's deposit that the government will insure, but very few individuals' deposits exceed this limit.

(E) The security of a bank against failure depends on the percentage of its assets that are loaned out and also on how much risk its loans involve.


B seems to be the best ans for this. E talks about security of bank against failure and we don't know how much assets and how much risks the loans involve.Our argument talks about the insurance provided by the govt to the depositors. So if we show that without insurance also there were failures then our argument will break and this is what B does.
Hope my reasoning is correct.if not , I am happy to learn

OA is option B.
the argument clearly mentions that the insurance is partly responsible for the high rate of bank failures.
Option B says that the frequent bank failures occurred as a result of depositors' fears of losing money in bank failures even in the absence of insurance.

I know that by giving a different cause for an effect, we can weaken the argument.
But in this case, when one cause is partly responsible , is the above statement still valid ?
VeritasKarishma

Can someone explain what the statement means ? " …., 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. "

I got B ,but admitted that I failed to capture the statement.

Hi, ThatDudeKnows

there is a lot going on in the argument.
Can you help me with choice B and E,
As per the argument- Insurance are partly reponsible for --> bank failures

In B, without insiance--> bank failures were happening frequently!
ok good weakner

In E, Security of failure depends on 2 irrelevent things but not on insurance.
hence there no way we can say- insurance is partly responsible. insurance is not
even in the equation here. good weakner!

what wrong?

Dear Dinesh654,
per B option your explanation is valid.
Concerning the E

Take into consideration that we do not need any explanation from what factors security hinges upon.
Conclusion provides strong "cause and effect" relationships stick to it.

Insurance - > Bank Failure

The option B provide another explanation that, indeed, the alternative cause is responsible for the effect.
Depositors' fears - > Bank Failure

Hope it helps

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