Money and Monetary Policy

Federal Reserve Board

The governing organization of the Federal Reserve System; also known as the Board of Governors.

Open Market Operations

The purchase or sale of government securities by a central bank; a key tool of monetary policy used to influence the money supply and interest rates.

Federal Open Market Committee (FOMC)

A committee of the federal reserve system that is responsible for open market operations.

Central Bank

A bank that provides financial services to a country's government and is responsible for the nation's monetary policy.

Discount Rate

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

Reserve Requirement (rr)

The fraction of checkable deposits that banks must keep on hand as reserves either as currency or on deposit with the Federal Reserve.

Excess Reserves

The amount of reserves that a bank can lend out to earn interest; equal to total reserves minus required reserves.

Monetary Policy

The actions taken by a country's central bank to influence the supply of money and credit in the economy.

Interest Rate

The payment made to agents that lend or save money, expressed as an annual percentage of the monetary amount lent or saved.

Money Market

A market in which the demand for and supply of money determine an interest rate or opportunity cost of holding money balances.

Aggregate Demand

A schedule or curve that represents the relationship between the quantity of real GDP demanded in the economy and the price level.

Bond Yield

The effective interest rate earned on a bond or another asset; equal to the net profit earned divided by the amount invested.

Liquidity Trap

A situation in which increasing the money supply does not lower interest rates, due to a flattening of the money demand curve.

Money Multiplier

The amount by which a change in reserves will change the money supply.

Transaction Demand

The demand for money to be used in daily transactions.

Contractionary Monetary Policy

The actions taken by a country's central bank to contract the money supply and raise interest rates primarily to decrease economic growth.

Expansionary Monetary Policy

The actions taken by a country's central bank to expand the money supply and lower interest rates with the objective of increasing real GDP.

Financial Services

Services provided by banks such as clearing checks, transferring funds, and receiving and delivering the currency banks need to operate.

Yield

The effective interest rate earned on a bond or other asset; equal to net profit divided by the amount invested.

Face Value

The nominal or dollar value of a security, typically printed on the face of the security.

Coupon Rate

The interest rate stated on a bond, as a percentage of the bond's face value.

Nominal Interest Rate

The interest rate or cost of borrowing money, expressed in percentage terms, usually stated on a loan or other asset.

Prime Rate

The lowest commercially available interest rate.

Federal Funds Rate

The interest rate that banks pay when borrowing reserves from other banks.

Balance Sheet

A statement of assets, liabilities, and net worth.

Fractional Reserve Banking

A banking system in which banks keep only a fraction of checkable deposits on hand and available for withdrawal.

Surplus

A situation in which the quantity supplied is greater than the quantity demanded at the current market price.

Shortage

A situation in which the quantity demanded is greater than the quantity supplied at the current market price.

Liability

A monetary debt or obligation.

Total Reserves

The total amount of reserves that a bank has, some of which must be kept on hand.

Real Interest Rate

The return on investment that is adjusted for inflation.

Fisher Equation

An equation relating the nominal interest rate to the real interest rate and the expected inflation rate.