ECONOMICS
FEDERAL RESERVE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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The Fed will lend money to a bank in a financial emergency.
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The Fed makes decisions about who a bank can lend money to.
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The Fed has the power to decide how much money a bank can lend out.
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The Fed decides interest rates for interbank loans.
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Detailed explanation-1: -A lender of last resort is the provider of liquidity to financial institutions that are experiencing financial difficulties. In most developing and developed countries, the lender of last resort is the country’s central bank.
Detailed explanation-2: -The Federal Reserve, or other central bank, typically acts as the lender of last resort to banks that no longer have other available means of borrowing, and whose failure to obtain credit would dramatically affect the economy.
Detailed explanation-3: -What is the lender of last resort ? The Fed is the lender of last resort because if a bank does not have enough reserves and other banks won’t loan to them the banks last option or last resort is to go to the fed.
Detailed explanation-4: -The central bank is referred to as the lender of last resort as it saves banks from possible failure and the banking system from a possible breakdown. In case commercial banks fail to meet their financial requirements from other sources, they can approach the central bank for a loan as a last resort.
Detailed explanation-5: -In this situation, they seek funds from the central bank in order to tide over the crisis. In India, RBI (Reserve Bank of India) is the central bank and saves commercial banks from bankruptcy. Due to this reason, RBI is known as the lender of last resort.