The function of the Central Bank as the lender of last resort means that when...
ECONOMICS
WAEC 2010
The function of the Central Bank as the lender of last resort means that when all other sources fail,
- A. the consumer can always borrow money from the Central Bank
- B. the government can ask the Central Bank to print more money
- C. commercial banks can raise loans from the Central Bank
- D. commercial banks can deposit money with the Central Banks
Correct Answer: C. commercial banks can raise loans from the Central Bank
Explanation
Central banks act as lenders of last resorts to commercial banks by lending them funds so as to stay afloat when the need arises. If banks get into liquidity shortages (run out of money), then the Central Bank is able to lend the commercial bank sufficient funds to avoid the bank running out of funds.
If a bank ran out of money, people would lose confidence and want to withdraw their money from the bank. The central steps in by lending these banks money so as they can remain in business.
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