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central bank
independent national authority that controls the monetary system
money supply
total amount of money in circulation
perfectly inelastic
because the money supply is fixed at any particular point in time, the supply of money is considered to be:
recessionary gap
If the economy functions at a level LOWER than the full employment level, the economy experiences this.
interest rate
what it costs to borrow money
low interest rate
this will induce firms to invest and consumers to spend more
high interest rate
this will induce firms and consumers to save
lender of last resort
banks act as this in a financial crisis, when consumers may lose faith in their bank and the banks need financial support
bond
a financial security that represents a promise to repay a fixed amount of funds
reserve requirement
the proportion of deposits that a commercial bank must keep in its vaults in reserve
aggregate demand
the total value of goods and services demanded by different groups at a given price level in an economy.
purchasing power
the number of goods and services an individual can buy
inflation targeting
the central bank using monetary policy to keep inflation close to an agreed target (~2%)
low unemployment
a priority of monetary policy; the opposite of high unemployment
fluctuations
the central bank is responsible for smoothing out ______ in the business cycle
external balance
this is achieved when the revenue from a country's exports is equal to the payments made for imports.
trade deficit
this occurs when visible imports outweigh visible exports.
commercial banks
privately owned banks that accept deposits and make loans and provide other services for the public
credit creation
the bank must keep a small percentage of deposited funds as cash. the rest they can lend out, and in doing so they pursue:
deposit
the amount of money individuals put into the bank for safekeeping, and/or to earn interest.
money multiplier
the amount of money the banking system generates with each dollar of reserves; reciprocal of the reserve requirement
total deposits
initial deposit x money multiplier
total credit creation
initial credit creation x money multiplier
open market operations
the central bank buying and selling bonds to regulate the money supply
expansionary monetary policy
monetary policy that increases aggregate demand
contractionary monetary policy
monetary policy that reduces aggregate demand
minimum lending rate
The rate at which the central bank charges commercial banks to borrow money. also known as the discount rate
quantitative easing
when the Fed buys longer-term government bonds or other securities. expansionary.
quantitative tightening
when the Fed sells longer-term government bonds or other securities. contractionary.
expansionary
the following monetary policies are _______. decreasing MRR, buying bonds, and decreasing the discount rate.
contractionary
the following monetary policies are _______. increasing MRR, selling bonds, and increasing the discount rate.
demand for money
the willingness and the ability of economic agents (consumers, firms, etc.) to use money at a given interest rate and at a specific point in time
transactions motive
the need to hold money for spending
precautionary motive
holding money for unexpected expenses and impulse buying
speculative motive
holding cash to avoid holding financial assets whose prices are falling
buys bonds
if the central bank ________, it pays investors in cash. It is this payment in cash that increases the money supply
nominal interest rate
the interest rate quoted by commercial banks (real interest rate + inflation premium)
real interest rate
the interest rate with inflation taken into account
Note 
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