Macroeconomics Ch. 12

Front 1

monetary policy

Back 1

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

Front 2

central bank

Back 2

a type of banker's bank; also serves as financial advisor to the gov't

Front 3

Fed Reserve Bank

Back 3

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

Front 4

FOMC

Back 4

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.

Front 5

6 functions of the Federal Reserve

Back 5

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.)

Front 6

monetary base

Back 6

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)

Front 7

3 tools of monetary policy

Back 7

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

Front 8

reserve requirement

Back 8

the percentage the Federal Reserve System sets as the minimum amount of reserves a bank must have

Front 9

Fed funds

Back 9

loans of excess reserves banks make to one another

Front 10

Federal funds rate

Back 10

the interest rate banks charge one another for Fed funds

Front 11

Treasury bonds

Back 11

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)

Front 12

discount rate

Back 12

the rate of interest the Fed charges for loans it makes to banks

Front 13

open market operations

Back 13

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

Front 14

expansionary monetary policy

Back 14

monetary policy that tends to reduce interest rates and raise income (money supply increases)

Front 15

contractionary monetary policy

Back 15

monetary policy that tends to raise interest rates and lower income (open market sale; money supply decreases)

Front 16

defensive actions

Back 16

designed to maintain the current monetary policy

Front 17

offensive actions

Back 17

actions meant to make monetary policy have expansionary or contractionary effects on the economy

Front 18

operating target

Back 18

Fed funds rate

Front 19

ultimate targets

Back 19

stable prices, acceptable employment, sustainable growth, and moderate long-term interest rate

Front 20

intermediate targets

Back 20

consumer confidence, stock rpices, interest rate spreads, housing starts, and a host of others

Front 21

Taylor rule

Back 21

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

Front 22

Taylor rule (equation)

Back 22

Fed funds rate = 2% + current inflation + 0.5 x (actual inflation less desired inflation) + 0.5 x (percent deviation of aggregate output from potential)

Front 23

nominal interest rates

Back 23

rates you actually see and pay
(= real interest rate + expected inflation rate)

Front 24

real interest rates

Back 24

nominal interest rates adjusted for expected inflation

Front 25

demand deposits

Back 25

checking accounts

Front 26

Quantity Theory of Money

Back 26

Calssical's perspective; that price level varies in response to changes in the quantity of money

Front 27

Equation of Exchange

Back 27

MV = PQ
(quantity of money times velocity of money equals price level times quantity of real goods sold)

Front 28

V

Back 28

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

Front 29

Q

Back 29

GDP

Front 30

direction of causation

Back 30

changes in the money supply cause changes in the price level (duh!)
MV -> PQ

Front 31

fiscal policy

Back 31

controlled by the government directly

Front 32

monetary regime

Back 32

a predetermined statement of the policy that will be followed in various situations

Front 33

monetary policy

Back 33

a response to events; chosen without a predetermined framework

Front 34

problems with using the monetary policy

Back 34

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

Front 35

liquidity trap

Back 35

a situation in which increasing reserves does not increase the money supply, but simply lead to excess reserves