An illiquid market is characterized by all of the options except that dealers are well capitalized. The incorrect statement about Bagehot's banking system is that the Bank of England could lend freely due to massive gold reserves. The Bagehot Principle is to lend freely at a low rate in times of crisis to prevent insolvent borrowers from failing. Discounting banks change their quoted discount rates to balance cash inflow and outflow. When a dealer's inventory is exhausted by demand, their most likely response is to raise the ask price to discourage further demand. Dealers make money by keeping prices constant as demand fluctuates.
An illiquid market is characterized by all of the options except that dealers are well capitalized. The incorrect statement about Bagehot's banking system is that the Bank of England could l…