Why does central bank is called the lender of last resort?
- It lends money to the government to finance its budget deficit.
- Central bank lends money to trade and industry to support their export operations.
- When a country runs out of money, the central bank prints more money.
- Central bank lends money to banks at all times.
Why does central bank is called the lender of last resort?
- It lends money to the government to finance its budget deficit.
- Central bank lends money to trade and industry to support their export operations.
- When a country runs out of money, the central bank prints more money.
- Central bank lends money to banks at all times.
Solution
Option 1 -> This describes fiscal operations, not the lender of last resort function.
Option 2 -> Central banks don't directly lend to trade and industry; they work through commercial banks.
Option 3 -> This describes money creation/printing, which is a different function from being a lender of last resort.
Option 4 -> Central bank provides liquidity to banks during financial distress when other sources are unavailable.
Hence, Option 4: Central bank lends money to banks at all times -> The central bank is called the 'lender of last resort' because it provides emergency liquidity support to commercial banks and financial institutions when they face temporary financial difficulties and cannot obtain funds from other sources. This function helps prevent bank failures, maintains stability in the banking system, and protects depositors. While the wording 'at all times' is not perfectly precise, this option best captures the essence of the lender of last resort function - providing credit to banks, particularly during financial crises or liquidity crunches. -> correct
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