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Chapter 10: Problem 6

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

Short Answer

Expert verified
Banks typically need the Fed to act as 'lender of last resort' more often in bad economic times. This is because during these periods, defaults on loans tend to increase and banks may face liquidity challenges. The lending from the Fed can prevent a potential collapse of the banking system.

Step by step solution

01

Understand the 'lender of last resort'

A central bank like the Fed acts as the 'lender of last resort' to prevent a potential collapse of the banking system during a crisis. It lends money to banks when no one else will.
02

Assess the economic conditions

During good economic times, banks are less likely to experience defaults on loans they've given out. The economy is generally stable and people as well as companies are able to repay their debts. Hence, they are less likely to need the Fed to act as a lender of last resort.
03

Evaluate the need for a 'lender of last resort' during bad times

On the contrary, during bad economic times, rates of loan defaults are usually high, banks may experience liquidity issues and might be unable to meet their short-term liabilities. Hence, they may need the help of the Fed as a lender of last resort.

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Most popular questions from this chapter

Define: a. Federal Open Market Committee (FOMC) b. Federal Reserve System (the Fed) c. Board of Governors of the Federal Reserve System d. reserve account

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?

Is specialization in a money economy more or less likely to happen than in a barter economy?

Define: a. discount rate b. federal funds rate c. open market operation

If the Fed wants the money supply to rise by a ridiculously high percentage - say, 1 million percent-could it accomplish this objective? Explain your answer.
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