Question

With reference to the Central Bank, explain the following: 

1. Monopoly of note issue
2. Lender of the last resort.

Answer 1

1. Monopoly of Note Issue—Central Bank of a country has the exclusive right (monopoly right) of issuing notes. This is called the currency authority function of the central bank. Actually, till the beginning of the 20th century, the central bank was known as Bank of Issue. The notes issued by the central bank are an unlimited legal tender.
2. Lender of the last resent—Commercial banks create demand deposits many times more than their cash reserves. However, there may be occasions when a bank suffers the crises of confidence. and people go crazy to withdraw their deposits. The depositors are gripped by the fear that the bank may run out its cash reserves. It is in such a situation that the central bank acts as a lender of last resort.