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# Bank depositors in the United States are all financially protected aga

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Bank depositors in the United States are all financially protected aga  [#permalink]

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Updated on: 16 Jan 2020, 07:33
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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.

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

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

Situation An economist contends that the high rate of bank failures can partly be blamed on federal insurance of bank deposits. The insurance removes any ﬁnancial incentive for depositors to seek those banks that are the most secure against failure. In the absence of more selective depositors, the banks need not be secure to compete for deposits.

Reasoning What assumption underlies the economist's argument? The economist argues that banks would have to be more secure in a competitive environment with more discriminating depositors. The economist encourages potential depositors to be more selective in choosing a bank and therefore must believe that many depositors have sufficiently sound ideas about what makes a bank secure against failure and can often apply those ideas in determining which banks are secure.

(A) Although this statement explains how a bank failure may occur, it is not a necessary assumption for the economists argument about how depositors choose a bank.

(B) The argument never discusses multiple accounts. so this statement cannot be assumed.

(C) The economist argues that depositors are not careful in selecting banks; this statement contradicts that position, at least for some depositors, so it cannot be assumed.

(D) In arguing about choosing banks, the economist mentions nothing about the relation of interest rates to bank failures, so this statement is not assumed.

(E) Correct. This statement properly identifies the economists underlying assumption that potential depositors are able to determine which banks are more secure.

Giving potential depositors a financial incentive to select only secure banks will not lead to increased bank security unless the potential depositors can distinguish banks that actually are secure from those that are not. Choice E is a statement of this prerequisite and is thus the best answer.

Originally posted by lexis on 08 May 2008, 11:45.
Last edited by Bunuel on 16 Jan 2020, 07:33, edited 7 times in total.
Renamed the topic and edited the question.
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Re: Bank depositors in the United States are all financially protected aga  [#permalink]

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28 Jun 2013, 13:18
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swati007 wrote:
@pqhai,

Hi,

why option D is incorrect?
if X->Y, then assumption could be that Y --x-->X(Y will not cause X)
or A->Y(A will cause Y)
In option D, aint we trying to do this --it assumes other cause (interest rate) as the reason of bank failures?

Hi swati007

GENERAL THEORY
First of all, to get a correct answer in assumption question, the first and most important thing is determine conclusions correctly. Please note that, there is a lot of information in an argument, but you just need to attack the question/assumption you're being asked. That makes GMAT more difficult than normal tests.

Back to this question, the argument uses a famous critical thinking logic "Conditional Reasoning".
The form is:
(1) If A, then B
(2) A
(3) Conclusion: Therefore B

Apply to this question:
(1) If depositors were more selective, then banks would need to be secure in order to compete for depositors' money
(2)..............?????
(3) Therefore, banks would need to be secure in order to compete for depositors' money

Now you see the conclusion more clearly ==> The missing part (2) is the assumption. What is (2)? You can apply the form above, and get the assumption very easy: depositors were able to be more selective in determining which bank is secure.

WHY D IS WRONG?
D say: The difference in the interest rates paid to depositors by different banks is not a significant factor in bank failures
Ask yourself: is this the assumption of the conclusion "banks would need to be secure in order to compete for depositors' money". Not at all. The main point of the conclusion is "need more sure to compete for depositors' money". But D talks about "the factor of bank failures". They don't match at any point.

TAKEAWAY:
In Assumption questions, determine the correct conclusions is KEY
There is a lot of info in the argument, Just focus on what you are being asked.

Hope that helps.

Regards.
##### General Discussion
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Re: Bank depositors in the United States are all financially protected aga  [#permalink]

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07 May 2009, 03:17
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Clear B

Bank depositors in the US 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 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 --> this is out of scope, no mentions about the borrowers. This is about the depositors
2. A significant proportion of depositors maintain accounts at several different banks --> best. Because depositors deposit at several different banks, this cause the high rates of banks failures. If they maintain their account in just a few banks, the high rates of failure won't appear and banks must compete more to each other to gain more customers
3. The more a depositor has to deposit, the more carefully he or she tends to be in selecting a bank --> this is not about the amount of deposit money in banks
4. The difference in the interest rates paid to depositors by different banks is not a significant factor in bank failures -->interest rate is out of scope
5. Potential depositors are able to determine which banks are secure against failure -->potential depositors are out of scope
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Re: Bank depositors in the United States are all financially protected aga  [#permalink]

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07 May 2009, 04:24
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IMO I think its E.

Analyzing choice B:
The argument says An economist argues that this insurance is partly responsible for the the high rate of bank failure
So, the insurance is not fully responsible for the issue at hand.Moreover,even if the depositors held accounts in several different banks, that does not guarantee a high rate of bank failures. Implies not necessary "B" is assumed.

However, only if the potential depositors are aware of the risks of bank failures, can they be more selective.
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Re: Bank depositors in the United States are all financially protected aga  [#permalink]

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07 May 2009, 05:05
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Mikko 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.

Pls explain your choice. I was confused of "Since...against failure" then I got the wrong choice

I will agree with E too.

Conclusion:
If depositors were more selective, then banks would need to be secure in order to compete for depositors' money.

negate E ..Potential depositors are not able to determine which banks are secure against failure.

then conlcusion falls apart.
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Re: Bank depositors in the United States are all financially protected aga  [#permalink]

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07 May 2009, 13:26
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Mikko 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.

Pls explain your choice. I was confused of "Since...against failure" then I got the wrong choice

premise:Bank depositors financially protected against bank failure because the govenment insures

premise:economist argues insurance partly reponsible for bank failure, since it removes from depositors any financial incentive to find out whether the bank that holds their money is secure

coclusion: If depositors were more selective, then banks would need to be secure in order to compete for depositors' money.

E undermines the conclusion by questioning whether depositors are able to tell which banks are secure. If they cant, then banks still fail.
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Re: Bank depositors in the United States are all financially protected aga  [#permalink]

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11 Apr 2013, 23:00
1
Mikko 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.

Pls explain your choice. I was confused of "Since...against failure" then I got the wrong choice

This is one of very classic logics used in GMAT.
YOU WILL DO, ONLY IF YOU"RE ABLE TO DO.

If you negate the assumption, the conclusion is broken.
You are not able to do X, you will not do X.

Apply to this question:
Depositor will select bank carefully, only if they have ability to determine which banks are secure against failure.

If you don't believe, use NEGATION technique.
Depositors do NOT have ability to determine, >>> They will NOT select bank carefully.

E clearly states that.

Hope it helps.
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Re: Bank depositors in the United States are all financially protected aga  [#permalink]

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12 Apr 2013, 09:01
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E.

If depositors were NOT able to distinguish between which banks are secure and failure, then the economist's argument falls apart. If this is indeed the case, whether the insurance is there or not, you can assume the same pattern would continue.
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Re: Bank depositors in the United States are all financially protected aga  [#permalink]

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27 Jun 2013, 21:05
@pqhai,

Hi,

why option D is incorrect?
if X->Y, then assumption could be that Y --x-->X(Y will not cause X)
or A->Y(A will cause Y)
In option D, aint we trying to do this --it assumes other cause (interest rate) as the reason of bank failures?

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Re: Bank depositors in the United States are all financially protected aga  [#permalink]

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28 Jun 2013, 01:30
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Let me try:

Author mentions that "since it removes from depositors any financial incentive" ---> so depositors are not financially concerned because in any case their money is secured.

D restates that depositors are not financially motivated and that the interest rates are not a significant factor for them. Sounds good, and may strengthen the arg little bit but the conclusion is different here.

Conclusion: If depositors were more selective, then banks would need to be secure in order to compete for depositors' money.

E assumes that the depositors have the knowledge of making decisions and can choose banks but they don't see any financial motive so they are least bothered.

Hope it helps.
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Re: Bank depositors in the United States are all financially protected aga  [#permalink]

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Updated on: 29 Jun 2013, 08:24
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
The economist's argument makes which of the following assumptions?

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

Hi Experts,
What is the Conclusion of the Argument. What is it that author is trying to put forward.
Request you to please decipher the conclusion of this argument.
Regards,
imhimanshu

Originally posted by imhimanshu on 29 Jun 2013, 08:15.
Last edited by Zarrolou on 29 Jun 2013, 08:24, edited 1 time in total.
Merging similar topics.
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Re: Bank depositors in the United States are all financially protected aga  [#permalink]

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29 Jun 2013, 08:35
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imhimanshu wrote:
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
The economist's argument makes which of the following assumptions?

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

Hi Experts,
What is the Conclusion of the Argument. What is it that author is trying to put forward.
Request you to please decipher the conclusion of this argument.
Regards,
imhimanshu

hi,
i am not an expert....
argument is like this:
let suppose Mr X belongs to US
Now according to argument whatever money MR X deposits in any bank of US....is safe also when bank becomes bankrupt==>this is because all the depositors money are insured by the government. hence you can say MR X never uses his brain in order to select bank for deposition.
now author is saying this is the reason for higher rate of bank failiures.
NOW if government now doesnt insures money of depositors then people like MR X will become selective in choosing bank in order to have more security for their money ....then a competetion will rise among different banks in order to grab customers.

here conclusion is: If depositors were more selective, then banks would need to be secure in order to compete for depositors' money

KUDOS if it helped
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Re: Bank depositors in the United States are all financially protected aga  [#permalink]

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13 Jul 2017, 02:34
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.

Reason why the banks are failing: Because the depositors were not concerned with the banks with whom they want to deposit the money. Because there was an insurance. So the assumption is that normally potential depositors are but because there is an insurance, people are not concerned about the bank failure.

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

(A) Bank failures are caused when big borrowers default on loan repayments.
Not the reason.

(B) A significant proportion of depositors maintain accounts at several different banks.
Not the reason.

(C) The more a depositor has to deposit, the more careful he or she tends to be in selecting a bank.
Classifies against a diffrent types of depositors, where as premise doesn't.

(D) The difference in the interest rates paid to depositors by different banks is not a significant factor in bank failures.
Not the reason.

(E) Potential depositors are able to determine which banks are secure against failure.
Potentially the reason.
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Re: Bank depositors in the United States are all financially protected aga  [#permalink]

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04 Dec 2017, 11:18
Hi Experts,

In this question
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.

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

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

I see the official answer is E) and it does make sense.
When I solved this question I selected D):

My doubt is that in the question it was mentioned that Insurance is primarily responsible for high rate of bank failures,then would D) be the correct answer as it provides an alternate reason and negation of D would imply that the difference in interest rated is a significant factor in bank failures.

Thanks,
Saksham
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Re: Bank depositors in the United States are all financially protected aga  [#permalink]

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13 Dec 2017, 19:19
Sakshamachiever wrote:
Hi Experts,

In this question
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.

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

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

I see the official answer is E) and it does make sense.
When I solved this question I selected D):

My doubt is that in the question it was mentioned that Insurance is primarily responsible for high rate of bank failures,then would D) be the correct answer as it provides an alternate reason and negation of D would imply that the difference in interest rated is a significant factor in bank failures.

Thanks,
Saksham

The economist does not argue that insurance is PRIMARILY responsible for the high rate of bank failures. Rather, the economist argues that the government insurance is PARTLY responsible for bank failures. See how one little word can change the entire meaning?

So it is certainly possible that the difference in interest rates described in choice (D) is a significant factor in bank failures. That does not mean that it is the ONLY factor. Both the government insurance and the difference in interest rates can influence bank failures.

Similarly, diet is a major factor in cholesterol levels. Does that mean that exercise can't also be a factor? Of course not. There can be multiple factors (and even multiple significant factors) affecting the same thing.

Thus, choice (D) is not a required assumption.
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Re: Bank depositors in the United States are all financially protected aga  [#permalink]

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02 Feb 2019, 04:10
lexis wrote:
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.

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

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

Conclusion of this argument was banks would need to be secure in order to compete for depositors money.

How is that ? if we as consumers knew which bank will not be secure and which will be secure

The same is told in E as well
(E) Potential depositors are able to determine which banks are secure against failure.

(A) Bank failures are caused when big borrowers default on loan repayments.
Talking about the reason, why failure happens

(B) A significant proportion of depositors maintain accounts at several different banks.
Ok that is good, but how are they careful, Not relevant.

(C) The more a depositor has to deposit, the more careful he or she tends to be in selecting a bank.

(D) The difference in the interest rates paid to depositors by different banks is not a significant factor in bank failures.
OOS, it is talking about the depositors and not about the bank.
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Re: Bank depositors in the United States are all financially protected aga  [#permalink]

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19 Sep 2019, 18:23
The argument is that insurance eliminates the incentive for depositors to investigate the financial security of their banks and thus is partly responsible for the high rate of bank failure.

Assumption

A- nothing is assumed about the mechanism of failure, just the case of failure
B - Incorrect as this isn't necessary for the argument to be true.
C - Again, not necessary for the argument to be true. What if each depositor only ever put in \$1, but more financially secure banks attracted more customers?
D - This MAY or MAY NOT be true. Either way the argument only says insurance is 'partly' responsible
E - is absolutely necessary. The insurance protects depositors IS NEEDED if depositors are incapable of determining the financial security of a bank.
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Bank depositors in the United States are all financially protected aga  [#permalink]

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01 Feb 2020, 02:50
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.

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

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

A. The economist does not need to assume this while making his conclusion. In fact the economist assumes that insurance is responsible for high rate of bank failures and not big borrowers.

B. Let us negate. Depositors do not maintain accounts at several different banks. The argument that the economist makes that depositors should be more selective will not break down. How does it matter whether they have one account or several accounts. As long as they are selective banks will compete to be more secure and rate of bank failure may go down.

C. Negate. The more a depositor has to deposit, the less careful he or she tends to be. If anything, this makes the conclusion even stronger since the economist wants the depositors to be more selective and choose more secure banks.

D. Negate. Difference in interest rates is a significant factor in bank failures. Fine. But insurance will still be another factor. And hence the depositors should still be more selective in order to stir competition among banks and make them more secure against failure.

E. Negate. Potential depositors cannot determine which banks are secure against failure. Now if they are not even able to determine which bank is more secure then there is no point in them being selective about it. They might end up selecting less secure banks and that will not cause competition among banks to be more secure. Instead they will remain just as they are and bank failures will continue to occur at a high rate. This is therefore a required assumption. Correct answer.
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Re: Bank depositors in the United States are all financially protected aga  [#permalink]

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18 Feb 2020, 05:26
I have problem understanding the answer choice, how to link to the premise and conclusion, even after reading the explanation i cannot link it, until i realize it just now. i will try to explain as simple as possible to those who are similar to me.

so the argument says, insurance creates less competition, because customer can choose any banks they like and they will be still be insured.
there is a need to change this system.
lets says the gov does not protect the banks, in order for banks to attract more customers, they need to create good rep,

P: the banks need a good rep
A:
C: the banks failure is lesser.

in order for the result to happen, not only banks have to do their work, {customer also have to be more selective or capable to distinguish banks performance}, this is what E says
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Re: Bank depositors in the United States are all financially protected aga  [#permalink]

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18 Feb 2020, 20:36
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.

Bank Depositors = Protected against bank failures because, Government insures.
Economist argue = Insurance = high rate of bank failure
Conclusion = Banks needs to be secure.

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

(A) Bank failures are caused when big borrowers default on loan repayments.

Wrong. It is mentioned in the premise that government insurance causes the bank failure.

(B) A significant proportion of depositors maintain accounts at several different banks.
Wrong. We have not been told about this in the premise. If this would have been the case then, banks would not need to be secure at all as the depositor won't lose all of it's money in one bank.

(C) The more a depositor has to deposit, the more careful he or she tends to be in selecting a bank.
Wrong. This is not an assumption but it strengthen the argument.

(D) The difference in the interest rates paid to depositors by different banks is not a significant factor in bank failures.
Wrong. This is out of scope.

(E) Potential depositors are able to determine which banks are secure against failure.
Right. The arguments say that banks = secure against failure because depositors are careful to chose the bank.
Re: Bank depositors in the United States are all financially protected aga   [#permalink] 18 Feb 2020, 20:36
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