The Existence of a Lender of Last Resort Creates Moral

question 72

Multiple Choice

The existence of a lender of last resort creates moral hazard for bank managers because:

• A) they have an incentive to take too much risk in their operations.
• B) officials are likely to undervalue the bank's portfolio of assets.
• C) they are less likely to apply for a direct loan from the central bank.
• D) banks seek loans from the central bank only after exploring other options.

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Definitions:

Effective Annual Rate

A measure of interest that accounts for compounding over a year, giving a true reflection of the financial cost or return.

Annual Percentage Rate

The annual rate charged for borrowing or earned through an investment, accounting for all costs.

Interest

The cost of using borrowed money, paid by the borrower to the lender, typically expressed as a percentage of the principal sum per year.

Stated Rate

The annual interest rate of a bond or loan without adjusting for compounding or other factors, often differing from the effective rate or annual percentage rate (APR).