How does the existence of the lender of last resort create moral hazard? Explain

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Trinidad TremblayLv2

6 Aug 2018

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Explain the Fed's function as a lender of last resort. What are the two reasons that the Federal Reserve acts as a "lender of last resort?" S

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Which multilateral institution serves as the lender of last resort?

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Why is the Fed's role as lender of last resort an important function of the Fed?

1. When there is a shortage of short-term credit, the Fed steps in as a lender of last resort—lending to banks and other financial institutions.

2. The Fed lends to other nations that face a financial crisis. Thus, the Fed acts as a lender of last resort—lending to banks and financial institutions of other nations when no one else will.

3. When households cannot obtain credit from banks, they can get credit directly from the Fed. Thus, the Fed's role as a lender of last resort helps households when no one else will.

4. As a lender of last resort, the Fed lends to the Federal government whenever it has a budget deficit. Thus, the Fed acts as the central bank, lending to the government when there is no other option.