Manec 453

Front 1

The central bank can control the availability of _______ and ________ in a country's economy. How do they do this?

Back 1

Money and Credit

Monetary Policy - Adjusting short-term interest rates

Front 2

What is monetary policy used for? Effects of expansionary vs tighter/restrictive...

Back 2

Stabilize economic frowth and inflation

Expansionary policy - lower interest rates, raises growth and inflation

Restrictive - higher interest rates - lowers growth and inflation

Front 3

Functions of a Modern Central Bank (as the gov bank)

Back 3

1. Manages the finances of the government
2. Controls availability of money and credit though interest rates

Front 4

Functions of a Modern Ventral Bank (as a banker's bank)

Back 4

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

Front 5

Primary reason for a country to create its own central bank:

Back 5

Ensure control over its currency

Front 6

5 specific objectives of central bankers:

Back 6

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

Front 7

What do most central banks see as thier primary job and why?

Back 7

Maintain price stability in order to keep inflation low and stable.

Front 8

Thoughts on the negativity of deflation...

Back 8

-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

Front 9

Higher interest rates business borrow _____ so they have fewer resources to ______ and _______.

Back 9

Less

Invest

Grow

Front 10

Why does te MCB want low, stable inflation?

Back 10

Inflation creates confusion and makes planning difficult. When inflation in high, growth is low

Front 11

Why does te MCB want high, stable growth?

Back 11

stable, predictable growth is higher than unstable, unpredictable growth.

Front 12

Why does te MCB want financial system stablility?

Back 12

Stable financial markets and institutions are a necessity for an economy to operate efficiently.

Front 13

Why does te MCB want stable interest rates?

Back 13

Interest-rate volatility creates risk for both lenders and borrowers.

Front 14

Why does te MCB want stable exchnge rates?

Back 14

Variable exchange rates make the revenues from foreign sales and the cost of purchasing imported goods hard to predict.

Front 15

What 4 things must a central bank do to be successful?

Back 15

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)

Front 16

What is the fed funds rate?

Back 16

The interest rate banks charge each other for overnight loans on thier excess deposits at the Fed (targeted by FOMC)

Front 17

What is the discount rate?

Back 17

The interest rate charged by the Fed on loans to commercial banks.