The concept of "lender of last resort" is that when
A)lending decreases, the Fed will be the last to resort to higher interest rates.
B)borrowing increases, the Fed will be the last to increase lending.
C)commercial banks are hesitant to lend, the Fed will step in and increase reserves.
D)a borrower has tried everyone else, the Fed will lend directly to them.

Question

Quizplus · Accepted Answer

The concept of "lender of last resort" is that when commercial banks are hesitant to lend, the Fed will step in and increase reserves. This is done in order to prevent a liquidity crisis and stabilize the financial system. Option A is incorrect because the Fed may resort to higher interest rates to control inflation but it is not related to the lender of last resort concept. Option B is also incorrect because the Fed may increase lending to stimulate the economy but it is not related to the lender of last resort concept. Option D is incorrect because the Fed may not directly lend to borrowers, as it is not within their mandate.

The Concept of "Lender of Last Resort" Is That When