Question

Give Reasons or Explain the following:
Central Bank acts as a lender of last resort.

Answer 1

Central bank is an apex bank that controls the entire banking system of a country and controls the supply of money in the economy through its various monetary policies. The central bank also lends money to commercial banks. When the commercial banks are facing liquidity crunch or any type of insolvency, the central bank are the last resort to provide loans against treasury bills, government securities, and bills of exchange. Even at the time of insolvency or any type of debt, the government approaches central bank for the loan. Therefore, central bank acts as a lender of last resort.