Question

Q22. Consider the following statements about Liquidity Adjustment Facility:

1. This arrangement allows banks to respond to liquidity pressures.

2. LAF includes only reverse repo agreements.

Which of the above statements are correct?

• A. a) 1 only
• B. b) 2 only
• C. c) Both 1 and 2
• D. d) Neither 1 nor 2

Answer 1

The correct option is A

a) 1 only

Liquidity Adjustment Facility

A liquidity adjustment facility (LAF) is a tool used in monetary policy that allows banks to borrow money through repurchase agreements. This arrangement allows banks to respond to liquidity pressures and is used by governments to assure basic stability in the financial markets. LAF includes both repos and reverse repo agreements.