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Chapter 10: Problem 4

What does it mean when we say the Fed is the lender of last resort?

Short Answer

Expert verified
The phrase 'The Fed is the lender of last resort' signifies that the Federal Reserve acts as a backup source of funds for banking institutions. It provides loans normally when banks can't secure necessary funds due to some crisis or liquidity issues, hence playing a crucial role in maintaining the stability of the nation's financial system.

Step by step solution

01

The Definition of 'The Fed'

'The Fed' is the Federal Reserve, which is the central banking system of the United States. Established by the Congress, its responsibilities include conducting the nation's monetary policy, promoting the stability of the financial system, and serving as a bank regulator.
02

The Meaning of 'Lender'

A lender refers to an individual, an organization or an entity that provides funds to others (borrowers) with the expectation that the funds will be paid back, typically with interest. Therefore, when we mention the Fed as a lender, it implies that the Federal Reserve provides funds to others.
03

Understanding 'Of Last Resort'

'Of last resort' indicates that this option is used when there are no other options available, or all other initiatives have failed. Hence, implying that the Fed is a source of funds when commercial banks struggle to find funds elsewhere due to some crisis.
04

Connecting 'The Lender of Last Resort'

Combining all the understandings, 'The Fed is the lender of last resort' means that the Federal Reserve provides funds usually to the banking institutions when they are unable to secure necessary funds from other resources. This role is vital to prevent possible financial crises and preserve the stability of the nation's financial system.

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Most popular questions from this chapter

Is a \(\$ 100\) check money? Explain.

Take a look at a Federal Reserve note. On it, you will read the following words: "This note is legal tender for all debts, public and private." What part of the definition of money does this message refer to?

Do you think banks need the Fed to act as "lender of last resort" more often during good economic times or bad economic times? Explain your answer

Fred creates \(\$ 2,000\) in currency with the snap of his fingers and deposits it in bank A. The reserve requirement is 10 percent By how much does the money supply increase?

The Fed wants to increase the money supply. a. What can it do to the reserve requirement? b. What type of open market operation can it conduct? c. What can it do to the discount rate?
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