CIMA Fundamentals Of Business Economics (BA1) Practice Exam

Providing emergency liquidity to banks that are solvent but short on cash is what the central bank does as a last resort. When funding dries up and confidence falters, the central bank can supply liquidity quickly, often in the form of cash or credit secured by collateral, so banks can meet withdrawals and continue payments. This ability to inject cash into the system helps prevent a bank run from spiraling into a broader crisis. The label cash reserve fits this idea because it embodies the central bank’s capacity to supply immediate liquidity to banks in distress. The other options don’t capture this role: tax revenue is government income, an insurance fund protects individuals from risk rather than backstopping banks’ liquidity, and an investment fund is about allocating assets for returns rather than stabilizing the banking system.