Which of the following is an action of central banks and governments to lessen the severity of a banking crisis?
A)maturity transformation
B)relaxing bank capital requirements
C)acting as a lender of last resort
D)opening a liquidity trap

Question

Quizplus · Accepted Answer

Acting as a lender of last resort is a common action taken by central banks and governments during a banking crisis to provide liquidity to banks that are experiencing a shortage of cash. This helps prevent a bank run and can help stabilize the financial system.

Option A, maturity transformation, refers to the process of borrowing short-term funds and using them to make long-term investments, which is a business activity rather than a government response to a crisis.

Option B, relaxing bank capital requirements, would increase the riskiness of banks and could make them more vulnerable to future crises, so it would not be a wise response to a current crisis.

Option D, opening a liquidity trap, is not an action that can be taken by central banks or governments. A liquidity trap is a situation where interest rates are so low that monetary policy is ineffective at stimulating economic growth.

Which of the Following Is an Action of Central Banks