Monetary Policy and Financial Systems

These flashcards cover key vocabulary and concepts related to monetary policy, financial systems, and economic principles discussed in the lecture notes.

Limited Reserve Regime

Banks hold minimal reserves; the required reserve ratio is set by the central bank.

Open Market Operations (OMO)

A primary tool involving the central bank buying or selling government bonds to change interest rates.

Expansionary Policy

A policy action to fight recession by increasing the money supply, lowering nominal interest rates, and increasing real output.

Contractionary Policy

A policy action to fight inflation by reducing the money supply, raising nominal interest rates, and decreasing real output.

Ample Reserve Regime

Post-2008 practice where reserves are abundant, with the required reserve ratio now set to zero.

Interest on Reserve Balances (IOR)

The interest rate commercial banks earn on funds deposited at the Federal Reserve, which acts as a floor for interest rates.

Dual Mandate of the Fed

The Fed aims for price stability and full employment.

Policy Lags

Delays in the effects of monetary policy due to recognition, implementation, and impact lags.

Liquidity

The ease with which an asset can be converted to cash without losing value.

Nominal Interest Rate

The advertised interest rate written into the contract.

Real Interest Rate

The nominal interest rate adjusted for inflation, reflecting actual purchasing power.

Fisher Equation

An equation stating that Real Interest Rate equals Nominal Interest Rate minus Inflation Rate.

Monetary Base (M0)

Includes currency in circulation plus bank reserves held in vaults, not counting toward the money supply.

Money Multiplier

A formula (1 / \text{Required Reserve Ratio}) representing the maximum amount the money supply can expand based on an initial deposit.

Automatic Stabilizers

Tax and spending policies that automatically reduce the effects of the business cycle without new government intervention.

Progressive Tax Systems

A system where tax rates automatically drop when income falls, reducing the financial burden during recessions.

Transfer Payments

Programs like unemployment insurance that activate during recessions, providing support to individuals and maintaining consumption.

What is Monetary Policy?

Actions undertaken by a central bank to influence the availability and cost of money and credit to help promote national economic goals.

Reserve Requirements

The fraction of deposits that banks must hold in reserve, not available for lending. A monetary policy tool.

Discount Rate

The interest rate at which commercial banks can borrow money directly from the Federal Reserve.

M1 Money Supply

Includes currency in circulation, demand deposits, traveler's checks, and other checkable deposits.

M2 Money Supply

Includes all of M1 plus savings deposits, money market deposit accounts, and small-denomination time deposits.

What is Fiscal Policy?

Government decisions regarding spending and taxation to influence the economy.