Final answer:
Central banks prevent the failure of member banks primarily through regulation and supervision, ensuring stability in the banking system. The correct answer is option c.
Step-by-step explanation:
The central bank plays a critical role in ensuring the stability and proper functioning of the banking system, which, in turn, affects the overall health of an economy. Central banks employ several mechanisms to prevent failures of member banks; among these are:
- Bank supervision: By regulating and supervising member banks, central banks ensure that they adhere to prudent practices, thus mitigating the risk of failures.
- Deposit insurance: Typically provided by a separate entity like the FDIC in the United States, deposit insurance protects bank deposits, thereby maintaining confidence in the banking system.
- Lender of last resort: In times of financial stress, central banks can provide temporary loans to solvent banks to prevent liquidity shortages from leading to systemic failures.
Open market operations, reserve requirements, and discount rates are also monetary policy tools used by central banks to manage the money supply and influence macroeconomic conditions. The use of these tools helps to promote stability and prevent severe economic downturns that could arise from widespread bank failures.
Given the options presented, the correct answer is c. By regulating and supervising member banks to ensure their stability.