Monetary Policy (Chapter 5)

VOCABULARY flashcards covering key terms from the lecture notes on monetary policy, indicators, policy tools, trade-offs, and global considerations.

Federal Open Market Committee (FOMC)

The Fed committee that determines monetary policy and targets inflation and unemployment goals; it decides the proper policy to implement and directs actions like Open Market operations.

Monetary policy

Actions by the Federal Reserve to influence the money supply and interest rates to stabilize inflation and unemployment and support economic growth.

Stimulative monetary policy (loose-money policy)

Policy that increases the money supply and lowers interest rates to encourage borrowing, investment, and spending.

Restrictive monetary policy (tight-money policy)

Policy that reduces the money supply or raises interest rates to slow borrowing, spending, and inflation.

Indicators of economic growth

Measures used to assess growth, including GDP, national income, unemployment, industrial production, retail sales, and housing activity.

GDP (Gross Domestic Product)

The total value of all final goods and services produced in an economy during a specific period.

National Income

The total income earned by firms and individuals during a specific period.

Unemployment rate

The percentage of the labor force that is jobless and actively seeking work.

Industrial production index

A measure of output in the industrial sector (manufacturing, mining, utilities).

Retail sales index

A measure of consumer spending on goods at retailers.

Home sales index

A measure of housing market activity, including new and existing home sales.

Leading Economic Indicators

Indicators that predict future economic activity (e.g., hours worked, unemployment claims, stock prices, expectations).

Coincident Economic Indicators

Indicators that move with the business cycle (e.g., employment, personal income, industrial production, sales).

Lagging Economic Indicators

Indicators that tend to rise or fall after the business cycle changes (e.g., unemployment duration, inventories, capital costs).

Producer Price Index (PPI)

Prices at the wholesale level; an inflation indicator that precedes consumer prices.

Consumer Price Index (CPI)

Prices paid by consumers; a primary measure of inflation at the retail level.

Wage rates

Labor compensation levels monitored as part of inflation indicators.

Oil prices

Energy prices that affect production and transportation costs and thus inflation.

Gold price

Gold price monitored as an indicator of inflation expectations.

Demand-pull inflation

Inflation caused when excessive demand pulls up overall prices.

Money supply

Total amount of money in the economy that the Fed can influence through policy actions.

Loanable funds market

Market where savers supply funds and borrowers demand funds; policy shifts the supply and affects interest rates.

Equilibrium interest rate

The rate where the quantity supplied of loanable funds equals the quantity demanded.

Yield curve

A graph of interest rates across maturities; stimulative policy tends to lower and flatten it.

Risk-free rate

Return on a risk-free security (usually Treasuries) used as the baseline for other rates.

Cost of equity

The expected return demanded by investors; roughly the risk-free rate plus a risk premium.

Rational expectations

Theory that agents borrow and spend based on expected inflation, which can influence policy effectiveness.

Recognition lag

Delay between a problem arising and its recognition by policymakers.

Implementation lag

Delay between recognizing a problem and implementing policy actions.

Impact lag

Delay between policy implementation and its full impact on the economy.

Quantitative easing (QE)

Fed purchases of large quantities of securities to inject liquidity and lower long-term yields.

Global monetary policy

The interaction of U.S. policy with global conditions; the Fed considers international conditions in its decisions.

Global crowding out

When foreign deficits or lower foreign rates draw capital abroad, affecting domestic interest rates.

Inflation targeting

Policy framework where a central bank aims for a specific inflation rate to guide policy and reduce uncertainty.

Monetary policy transmission to financial markets

How policy actions affect prices and yields in money, bond, mortgage, stock, and currency markets.

Liquidity in debt markets

Ease of trading debt securities; Fed actions (like QE) aim to improve liquidity during crises.

Treasury bills (T-bills)

Short-term U.S. government securities used in monetary policy operations; prices and yields respond to Fed actions.

Dual mandate

The Fed’s goal to achieve low inflation and low unemployment (stable prices and maximum employment).