Q6 - The government provides insurance

[ptroxler08]

Not exactly sure how C is correct, could someone please explain.

[bbirdwell]

The argument is as follows:

1. bank deposits are insured
2. banks pay the premiums
3. depositors benefit most from the insurance
Therefore, the depositors should bear the cost of the premiums.

Although we know that the banks are paying the premiums, we don't know whether the banks pass that charge onto the customers. The author assumes that this is not happening, which is why (C) is correct.

See what I mean? The banks are the party required to actually pay the premium to the insurers, but they might charge the depositors somehow to make that money back from them.

This is what (C) says. Try negating it to see the effect it has on the conclusion. What if the banks always cover their costs by paying lower interest rates for insured accounts? Well, in that case, the depositors are in fact bearing the cost of the premiums, and the argument's conclusion falls apart.

[deedubbew]

So E is wrong because it would establish that the banks would not have to bear the cost of insurance?

[GeneW]

Just want some clarification on answer choices C and E.

In C, there is no mention of "uninsured deposits" in the stimulus. Does that make it out of scope?

In E, does this fill in the assumption gap that all accounts are insured and thus the bank has to pay the premium for the insurance?

Thank you.

[christine.defenbaugh]

Thanks for posting deedubbew and GeneW!

Let's rip this one apart top to bottom!

This argument core is actually a three-part core:

PREMISE:Depositors are the ones who benefit from the insurance on their accounts
INTERMEDIARY CONCLUSION: The depositors should bear the cost of the insurance
CONCLUSION: The depositors should pay the premiums

We could be tested on the gap between either the premise and the intermediary conclusion OR the gap between the intermediary conclusion and the final conclusion. In fact, question 5 of this section is attached to the same stimulus and tests the former.

The gap between the intermediary conclusion and the final conclusion is the leap between "should bear the cost" and "should pay the premiums". Sure, paying the premiums is one way to bear the cost, but is it the only way or the best way? What if there were a better way for the depositors to 'bear the cost'? In fact, what if they were already bearing the cost?!

That's exactly what (C) targets! We must be assuming they aren't already bearing the cost! If we negate (C), then the banks would paying the insured accounts a lower interest rate than the uninsured accounts. In other words, the bank would charging a fee to the insured accounts to cover the cost of the premiums! If this were true, then it would be silly to conclude that the depositors should pay the premium directly - they would already be 'bearing the cost' of the premiums by having lower interest rates.

The 'uninsured deposits' are not out of scope here, as we need that contrast to make it clear that the insured accounts are getting hit was a cost that's more than normal.


(E), on the other hand, is not relevant to the argument. We don't need it to be true that the government does not allow uninsured accounts. Let's negate it! What if there were uninsured accounts out there. Does that destroy the argument? No! It wouldn't have any impact on the claim that insured depositors should pay their premiums!

If there are uninsured accounts out there, then for those accounts the banks would not be paying any premiums. So, essentially, this argument is not about those accounts. This argument is about the insured accounts, and who pays for that insurance.

For completeness' sake, let's spin through the remaining wrong answer choices:
(A) "loans the bank makes" is out of scope. This argument is about insurance on individual accounts, and who pay for that.

(B)What if private insurance companies did have the resources to provide deposit insurance instead of having the government do it - would that change anything about this argument?

(D) What if there were no limit to the coverage amount? Does that destroy the argument? No! We don't need there to be a limit on coverage for this argument to make sense!

Please let me know if this helps clear this question up!

[economienda]

Shouldn't (C) say: "Banks do not always cover the cost of the deposit-insurance premiums by CHARGING depositors HIGHER interest rates on insured deposits than the banks would on uninsured deposits"

the original says PAYING instead of CHARGING. But how can the banks PAY depositors interest rates?

One example: FedLoans charges me 5% interest on my student loans; it would be silly to say that they pay me a 5% interest. I'm the one that pays it!