During a financial panic, the use of Bagehot's Law is equivalent to the monetary authority targeting the _____ in the face of an unstable _____ curve.
A) interest rate, IS
B) interest rate, LM
C) money supply, IS
D) money supply, LM

Question

Quizplus · Accepted Answer

Bagehot's Law suggests that during a financial panic, the central bank should lend freely (at a high rate) to solvent institutions against good collateral. This is equivalent to targeting the interest rate to ensure liquidity in the system, which directly affects the LM (liquidity preference-money supply) curve, not the IS (investment-savings) curve. The LM curve represents the relationship between the liquidity preference (demand for money) and the money supply.

During a Financial Panic, the Use of Bagehot's Law Is