Author Question: Explain the issues involved with the Fed acting as a lender of Last Resort (LLR). What will be an ... (Read 28 times)

mp14 · **on:** Jun 30, 2018

Explain the issues involved with the Fed acting as a lender of Last Resort (LLR).

What will be an ideal response?

Question 2

What do you think about dollarization?

What will be an ideal response?

Bsand8 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

On the one hand, LLR enables the Fed to avoid panic and disturbance to proper functioning of financial markets. On the other hand, using the policy may cause problems of moral hazard.

Answer to Question 2

This is an open question. The answer is probably a bad idea unless in the very short run. Students should talk about the loss of seigniorage and the gain in credibility against devaluation, which should lead to lower domestic interest rates. Students should mention the importance of political will to repair the fundamental economic weaknesses of the country.