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17 Cards in this Set
- Front
- Back
The central bank can control the availability of _______ and ________ in a country's economy. How do they do this?
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Money and Credit
Monetary Policy - Adjusting short-term interest rates |
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What is monetary policy used for? Effects of expansionary vs tighter/restrictive...
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Stabilize economic frowth and inflation
Expansionary policy - lower interest rates, raises growth and inflation Restrictive - higher interest rates - lowers growth and inflation |
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Functions of a Modern Central Bank (as the gov bank)
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1. Manages the finances of the government
2. Controls availability of money and credit though interest rates |
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Functions of a Modern Ventral Bank (as a banker's bank)
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1. Gaurantees sound banks can do business even during crises by lending to them
2. Operates a payments system for interbank paymnets 3. Oversees financial institutions to ensure confidence in thier soundness |
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Primary reason for a country to create its own central bank:
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Ensure control over its currency
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5 specific objectives of central bankers:
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1. Low and stable inflation
2. High and stable real growth, togther with high employment 3. Stable financial markets and institutions 4. Stable interest rates 5. Stable exchange rate |
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What do most central banks see as thier primary job and why?
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Maintain price stability in order to keep inflation low and stable.
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Thoughts on the negativity of deflation...
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-Makes debts more difficult to repay, increasing defaults which hurts banks
-employer would have to cut nominal wages and couldn't rely on inflation to cut real wages |
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Higher interest rates business borrow _____ so they have fewer resources to ______ and _______.
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Less
Invest Grow |
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Why does te MCB want low, stable inflation?
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Inflation creates confusion and makes planning difficult. When inflation in high, growth is low
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Why does te MCB want high, stable growth?
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stable, predictable growth is higher than unstable, unpredictable growth.
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Why does te MCB want financial system stablility?
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Stable financial markets and institutions are a necessity for an economy to operate efficiently.
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Why does te MCB want stable interest rates?
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Interest-rate volatility creates risk for both lenders and borrowers.
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Why does te MCB want stable exchnge rates?
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Variable exchange rates make the revenues from foreign sales and the cost of purchasing imported goods hard to predict.
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What 4 things must a central bank do to be successful?
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1. Independence (decisions made free of political "short-term" pressures)
2. Make decisions by committee (pooled knowledge) 3. Accountable and Transparent (policy-makers must be accountable and clearly comm obj, decisions, and methods.) 4. Policy Framework (clearly state policy goals and tradeoffs among them) |
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What is the fed funds rate?
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The interest rate banks charge each other for overnight loans on thier excess deposits at the Fed (targeted by FOMC)
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What is the discount rate?
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The interest rate charged by the Fed on loans to commercial banks.
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