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What does deposit insurance protect a depositor against?
AA fall in the interest rate paid on the account
BLoss of the deposit if the institution should fail
CA rise in the fees the institution may charge
DA fall in the purchasing power caused by inflation
Answer & Solution
Correct answer: B. Loss of the deposit if the institution should fail
1. Deposit insurance covers deposits held at banks and thrift institutions.
2. The event insured against is the failure of the financial institution itself.
3. If the institution fails, the insured depositor does not lose the covered money.
4. Falling interest rates and inflation both reduce what a deposit is worth, but neither is a failure, so neither is insured.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 15 "Understanding Money and Financial Institutions", section 15.4 Insuring Bank Deposits_
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