When the central bank acts as a lender of last resort, it:
A)raises reserve requirements.
B)reduces reserve requirements.
C)provides a liquidity trap.
D)provides funds to financial institutions that cannot borrow from the private credit markets.

Question

Quizplus · Accepted Answer

When the central bank acts as a lender of last resort, it provides funds to financial institutions that cannot borrow from the private credit markets. This is intended to prevent financial panics and destabilization of the financial system by ensuring that banks have access to the funds they need to meet their obligations and maintain liquidity. The other options, raising or reducing reserve requirements or providing a liquidity trap, are not actions typically taken by a central bank when acting as a lender of last resort.

When the Central Bank Acts as a Lender of Last