ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The central bank has been described as the “lender of last resort, ” which means it is responsible for providing its nation’s economy with funds when commercial banks cannot cover a supply shortage. In other words, the central bank prevents the country’s banking system from failing.

Detailed explanation-2: -The global financial crisis of 2007-2009 showed that countries needed to identify and contain risks to the financial system as a whole. Many central banks adopted the use of prudential tools and established macroprudential policy frameworks to promote financial stability.

Detailed explanation-3: -Similar to commercial banks, central banks hold assets (government bonds, foreign exchange, gold, and other financial assets) and incur liabilities (currency outstanding). Central banks create money by issuing banknotes and loaning them to the government in exchange for interest-bearing assets such as government bonds.

Detailed explanation-4: -The interests on these loans are how the banks make money.) Central banks lend money to commercial banks in times of crisis so that they do not collapse; this is why a central bank is called a lender of last resort. And this is one of the reasons central banks matter.

Detailed explanation-5: -The central bank lends money to government when they are facing liquidity crunch or any type of insolvency. The central bank are the last resort to provide loans to the government against any type of collateral.