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Questions
"The central bank is the lender of the last resort." Explain.
Central Bank is the "lender of the last resort". Justify either for or against.
Solution
- Commercial banks can seek financial support from other banks.
- However, other commercial banks may not be able to provide funds to the bank in need. In this situation, the central bank gives funds to a commercial bank through loans or securities purchases.
- It helps to prevent widespread financial panic by stepping in when no other lenders are available.
- Maintaining confidence in the financial sector benefits the economy as a whole.
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