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35 Cards in this Set

  • Front
  • Back
monetary policy
a policy of influencing the economoy through changes in the banking system's reserves which in turn influence the money supply and the amount of credit availability in the economy;
control by the Fed
central bank
a type of banker's bank; also serves as financial advisor to the gov't
Fed Reserve Bank
1. semiautonomous
2. owned by the member banks who have few privileges of ownership
3. Board of Governors is appointed by the U.S. President, not the owners
4. almost all profits go to the gov't, not the owners
5. in short, Fed is owned by members bank in form only, in practice, it is an agency of the U.S. federal govt
Federal Open Market Committee
the Fed's chief policymaking body (make actual decisions about monetary policy)
all 7 Board of Governors, together with the president of the NY Fed and a rotating group of 4 of the presidents of the other regional banks, vote on the FOMC.
6 functions of the Federal Reserve
1. conduct monetary policy
2. supervising and regulating financial institutions in the U.S.
3. serves as a "lender of last resort"
4. provides banking services and advice to the Federal Government
5. issuing coin and curency
6. provides financial services to banks and financial institutions (check clearing services, etc.)
monetary base
made up of vault cash, deposits of the Fed, plus currency in circulation
(the monetary base held at banks serve as legal reserves of the banking system; Fed influences the amt of $ in the economy and the activities of the banks by controlling the monetary base)
3 tools of monetary policy
1. changing the reserve requirement
2. changing the discount rate
3. executing open market operations (buying and selling bonds) and thereby affecting the Fed funds rate
reserve requirement
the percentage the Federal Reserve System sets as the minimum amount of reserves a bank must have
Fed funds
loans of excess reserves banks make to one another
Federal funds rate
the interest rate banks charge one another for Fed funds
Treasury bonds
banks hold them and sell them when short on reserve; also called "secondary reserve" and they do not count as bank reserves (not IOUs of the Fed)
discount rate
the rate of interest the Fed charges for loans it makes to banks
open market operations
the Fed's buying and selling of government securities (the only type of asset the Fed is allowed by law to hold in any appreciable quantity); also the primary tool of monetary policy
expansionary monetary policy
monetary policy that tends to reduce interest rates and raise income (money supply increases)
contractionary monetary policy
monetary policy that tends to raise interest rates and lower income (open market sale; money supply decreases)
defensive actions
designed to maintain the current monetary policy
offensive actions
actions meant to make monetary policy have expansionary or contractionary effects on the economy
operating target
Fed funds rate
ultimate targets
stable prices, acceptable employment, sustainable growth, and moderate long-term interest rate
intermediate targets
consumer confidence, stock rpices, interest rate spreads, housing starts, and a host of others
Taylor rule
set the Fed funds rate at 2% plus current inflatin if the economy is at desired output and desired inflation. If the inflation rate is higher than desired, increase the Fed funds rate by 0.5 times the difference between desired and actual inflatin. Similarly, if output is higher than desired, increase the Fed funds rate by 0.5 times the percentage deviation
Taylor rule (equation)
Fed funds rate = 2% + current inflation + 0.5 x (actual inflation less desired inflation) + 0.5 x (percent deviation of aggregate output from potential)
nominal interest rates
rates you actually see and pay
(= real interest rate + expected inflation rate)
real interest rates
nominal interest rates adjusted for expected inflation
demand deposits
checking accounts
Quantity Theory of Money
Calssical's perspective; that price level varies in response to changes in the quantity of money
Equation of Exchange
(quantity of money times velocity of money equals price level times quantity of real goods sold)
No. of times per year a dollar cirulates around in the economy to generate a dollar's worth of income
OR, the amount of time a dollar circulates through the economy to support a given amount of income
direction of causation
changes in the money supply cause changes in the price level (duh!)
MV -> PQ
fiscal policy
controlled by the government directly
monetary regime
a predetermined statement of the policy that will be followed in various situations
monetary policy
a response to events; chosen without a predetermined framework
problems with using the monetary policy
1. knowing what policy to use
2. understanding the policy you are using
3. lags in monetary policy
4. liquidity trap
5. political pressure
6. conflicting international goals
liquidity trap
a situation in which increasing reserves does not increase the money supply, but simply lead to excess reserves