CFA Level I · CFA Level I Exam · Monetary Policy
Which of the following is the most likely reason central banks act as lender of last resort?
Central banks act as lender of last resort to supply emergency liquidity to solvent banks facing shortages, preventing runs and contagion from becoming a systemic crisis. The role supports financial stability rather than tax revenue or restricting private lending.
- ATo maintain a fixed tax revenue for the treasury
- BTo limit commercial banks' lending to the private sector
- CTo prevent liquidity shortages at solvent banks from becoming systemic crisesCorrect
Explanation
Providing emergency liquidity prevents bank runs and contagion in the financial system, supporting financial stability. It is not intended to raise tax revenue or cap lending.
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