ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -When a commercial bank faces financial crisis and fails to obtain funds from other sources, then the central bank plays the vital role of ‘lender of last resort’ and provides them with the financial assistance in the form of credit. This role of the the central bank saves the commercial bank from bankruptcy.

Detailed explanation-2: -The central bank is the custodian of the banking reserves of the country. Whenever necessary, it also lends money to other banks by rediscounting bills of exchange and against approved commercial papers. The central bank is the lender of the last resort because the money supply of the country is under its control.

Detailed explanation-3: -Open market operations (“OMOs”) are the central bank’s primary tool of monetary policy. If the central bank wants interest rates to be lower, it buys bonds. Buying bonds injects money into the money market, increasing the money supply.

Detailed explanation-4: -Key Takeaways The Fed can increase the money supply by lowering the reserve requirements for banks, which allows them to lend more money. Conversely, by raising the banks’ reserve requirements, the Fed can decrease the size of the money supply.