Question

what does it mean that tge federal reserve is the “Lender of last resort” and why is this role inimportant in a bank panic？

Answer 1

Fed works as lender of last resort as they offer loans to banks and other financial institutions which are on the verge of collapse. Fed would financially support those institutions who do not have any other support and affect the economy negatively if it collapse. It works as an backbone for commercial banks as when they banks fall, Fed provide them enough monetary support such that people do not confidence in the banking system and prevent people from withdrawing their money due to panic. If Fed do not support, people would easily loose confidence in the banking system and economy will move easily into recession.