If the central bank can act as a lender of last resort during a banking panic,banks can

Question

Quizplus · Accepted Answer

When the central bank acts as a lender of last resort, it provides banks with the necessary funds to satisfy customer withdrawals, which helps to restore the public's faith in the banking system. Option A is incorrect as banks calling in their loans can lead to a further decrease in available funds, worsening the panic. Option C is also incorrect as borrowing more from the central bank reduces the bank's reserves, leading to a further loss of faith in the system. Option D is incorrect as it suggests the central bank is encouraging more borrowing, which can worsen the situation during a banking panic.

If the Central Bank Can Act as a Lender of Last