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44 Cards in this Set

  • Front
  • Back
o Monetary policy
policy involving altering the quantity of money thus affecting the level of interest rates and extent of borrowing
o Central bank
Institution designed to conduct monetary policy and regulate the banking system
o Tools to affect quantity of money
• Open markets operation
• Reserve Requirements
• Discount Rate
o OMO
central bank buying or selling bonds to influence quantity of money and interest rates
o FOMC – Federal Open market Committee
makes decisions about when to buy/sell US government bonds
o Reserve Requirements
proportion of its deposits that a bank is legally required to deposit with the central bank
• Greater amount of reserves, less money to lend out and vice versa
o Discount Rate
the interest rate charged by the central bank when it makes loans to commercial banks
o Expansionary Monetary policy
monetary policy that increases supply of money and quantity of loans; “loose” monetary policy
o Contractonary Monetary Policy
monetary policy that reduces supply of money and loans; “tight” monetary policy
o Federal funds rate
interest rate at which one bank lends funds to another bank overnight (Bonds)
• Effects of Monetary Policy on AD
o Effects interest rates, available quantity of loanable funds
o Tight monetary policy = high interest rates, lower amount of loanable funds – opposite of loose monetary policy
o Economy – in recession with high unemployment – loose monetary policy can help
o Tight monetary policy – can lower inflation
o Excess Reserves
reserves that banks hold above the legally mandated limit
o Velocity
The speed with which money circulates through the economy
Formula for Velocity
o V=Normal GDP/Money Supply
o Money Supply x Velocity = nominal GDP
o Changes in velocity are related to innovations in banking and finance
• Growth in electronic payments
• Rise in personal borrowing/ CC use
o Inflation targeting
rule that the central bank is required to focus only on keeping inflation low
Leverage Cycle
when economic times are good, banks are eager to lend, and firms are eager to borrow
o Banks causing Macroeconomic harm
• When people lose confidence in banks and withdraw money
• When banks have low/negative net worth and don’t take loans
o 3 Policies for safe/stable banking
• Deposit insurance
• Examine bank finances
• Emergency short-term loans
• Bank run
when depositors race to the bank to withdraw their deposits they fear will be lost
• Bank Supervision
o US Department of Treasury
o Office of the Comptrollers of the Currency
o National Credit Union Administration
o Federal Reserve
o Lender of last resort
central bank can step in - short term emergency loans
• Inflation
general ongoing rise in level of prices in an economy
o Ongoing rise in prices
o Affects goods, services, wages and prices
o Basket goods/Services
a hypothetical group of different items with specified quantities of each one, used as a basis for calculating how the price level changes over time
Basket goods formula
level in new year – level in original year x 100 = % change
level in original year
o Index number
when one arbitrary year is chosen to equal 100 and the values of all other years are set proportionally
o CPI – Consumer Price Index
a measure of inflation calculated by US government statisticians based on price level from a basket of goods and services that represents the purchases of the average consumer
o Substitution bias
inflation rate caused by using a fixed basket of goods over time tends to overstate the true rise in the cost of living because it doesn’t take into account that the person can substitute away from goods whose prices rise by a lot
o Quality/New goods Bias
inflation calculated using a true vise in cost of living because it doesn’t take into account improvements
o PPI – Producer Price Index
inflation based on prices paid for supplies and inputs by producers of goods and services
o IPI – International Price Index
Inflation based on prices of merchandise exported or imported
o ECI – Employment Cost Index
inflation based on wage paid in labor markets
o GDP Deflator
measure of inflation based on all components of GDP (C, I, G, E, I)
o 2 First waves of inflation
WW1
WW2
o 2 periods of deflation
• Following recession of 1920-21
• Great Depression – 1930s
o Hyperinflation
extremely high inflation
• Russia early 1990s (2500%)
• Latin America 1980s-90s
• Recent years – Zimbabwe
o Nominal value
economic statistics actually announced at that time, not adjusted for inflation; contrast with real value
o Real value
economic statistics after is has been adjusted for inflation; contrast with nominal value
o Real interest rate
rate of interest with inflation subtracted
Real interest rate
Real interest rate = Nominal Interest Rate – Inflation Rate
o Indexed
when a price, wage, or interest rate is adjusted automatically for inflation
o COLAS
Contemporary Provisions that wage increases will keep of with inflation
o ARM – Adjustable rate Mortgage
A loan used to purchase a home in which the interest rate varies with the rate of inflation
o Indexed bonds
incentives to encourage inflation