Examkin

Question

Difficulty: EasyCentral Bank: Functions and Monetary Policy Instruments

When commercial banks experience temporary liquidity shortages and are unable to borrow from the interbank market, they can obtain emergency financial accommodation directly from the Central Bank. Which function of the Central Bank is demonstrated in this scenario?

  1. Lender of last resortAnswer
  2. B
    Banker to the government
  3. C
    Issuer of legal tender
  4. D
    Supervisor of foreign exchange

Answer

Lender of last resort
The central bank acts as the lender of last resort by discounting bills and granting short-term emergency advances to commercial banks facing severe liquidity shortages when no other credit facilities are available.

Step-by-Step Solution

1
Analyze the action described in the question stem
Commercial banks encountering short-term liquidity deficits receive financial assistance directly from the Central Bank when alternative sources fail.
Identifying the nature of interbank financial rescue pinpoints the central bank's protective role.
2
Relate the action to standard Central Bank functions
The function that acts as a financial safety net for commercial banking institutions during liquidity crises is known as lender of last resort.
This function safeguards public confidence and protects the stability of the entire banking system.

Key Concept

Central Bank Functions - Lender of Last Resort
Estimated Time:45s
Rate this question

Topics

Central Bank: Functions and Monetary Policy Instruments

More questions from this topic