Liquidity can
A) not be created.
B) be created by borrowing long and lending short.
C) be created by borrowing short and lending long.
D) only be created by the government.

Question

Quizplus · Accepted Answer

Liquidity can be created by borrowing short and lending long, which is the basic concept behind banks and financial institutions. By taking in short-term deposits and lending out long-term loans, banks create liquidity in the financial system. Option A is false, as liquidity can be created through various means, including monetary policy implemented by central banks. Option B, borrowing long and lending short, is not a viable method of creating liquidity, as it exposes the institution to interest rate risk. Option D is also false, as liquidity can be created by private institutions without government involvement.

Liquidity Can