Question

Question 3 of 10

2 Points
Which of the following best describes how the Federal Reserve Bank helps
banks during a bank run?
A. The Federal Reserve Bank acts as an insurance company that
pays customers if their bank fails.
B. The Federal Reserve Bank regulates exchanges to prevent the
demand for withdrawals from rising above the required reserve
ratio.
C. The Federal Reserve Bank has the power to take over a private
bank if customers demand too many withdrawals.
D. The Federal Reserve Bank can provide a short-term loan to banks
to prevent them from running out of money.
SUBMIT

Answer 1

Answer: D. The Federal Reserve Bank can provide a short-term loan to banks to prevent them from running out of money.

Explanation: The Federal Reserve Banks are set up by the nation's federal government to perform functions such as saving and keeping reserves of commercial banks and also lend to these banks when the need arises by providing short term loans. One of such situations when the Federal Reserve Banks provide short term loan cover for commercial banks include the run period which occurs when depositors concurrently withdraws their money from a bank due to perceived collapse or solvency. At this point, such bank may need help of the federal reserve bank to cover up due to simultaneous cash withdrawal request of large number of customers, thereby preventing the bank from running out of cash.