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FUNCTIONS OF CENTRAL BANKS
What does Bagehot's principle prescribe regarding the rate of interest at which a central bank should lend during a banking panic?
Bagehot's principle prescribes that the central bank should lend at a high (penal) rate of interest, not a concessional rate, to minimize moral hazard.
What is the primary distinction between a central bank and a commercial bank in terms of profit motive?
Central banks are not profit-driven; commercial banks are.
Why does Bagehot's doctrine require a central bank to charge a penal rate when acting as Lender of Last Resort?
A penal rate deters banks from taking excessive risks, since they know that emergency central bank assistance will be costly, thereby minimizing moral hazard.
Who authored the foundational 1873 text that articulated the Lender of Last Resort principle?
Walter Bagehot authored 'Lombard Street' in 1873.
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