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

Question

If the central bank can act as a lender of last resort during a banking panic, banks can A. Call in their loans to their customers and eventually restore the publics faith in the banking system. B. Borrow more and more money from the central bank and this will lower it's reserves and decrease the public's faith. C. Satisfy customer withdrawal needs and eventually restore the public's faith in the banking system. D. Encourage the public to borrow directly from the central bank and this will worsen the banking panic. If the central bank can act as a lender of last resort during a banking panic, banks can A. Call in their loans to their customers and eventually restore the publics faith in the banking system. B. Borrow more and more money from the central bank and this will lower it's reserves and decrease the public's faith. C. Satisfy customer withdrawal needs and eventually restore the public's faith in the banking system. D. Encourage the public to borrow directly from the central bank and this will worsen the banking panic. A. Call in their loans to their customers and eventually restore the publics faith in the banking system. B. Borrow more and more money from the central bank and this will lower it's reserves and decrease the public's faith. C. Satisfy customer withdrawal needs and eventually restore the public's faith in the banking system. D. Encourage the public to borrow directly from the central bank and this will worsen the banking panic.

Explanation / Answer

Option (C).

During a banking panic, the Central Bank extends loans to distressed banks such that they can fulfill customers' withdrawal needs without encountering a bank run. This restores public's faith on banking system.

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