money banking

Federal Reserve System

Founded in 1913 to stabilize American financial system.

Bank panics

Financial crises causing widespread bank failures.

Inelastic currency

Currency that cannot easily adjust to demand changes.

Discount window loans

Loans provided by Federal Reserve to banks.

Open market operations

Buying and selling government securities to influence money supply.

Dual mandate

Federal Reserve's goals of maximum employment and stable prices.

Federal Open Market Committee

Group that sets target federal funds rate range.

Expansionary monetary policy

Policy to stimulate economy during recession.

Contractionary monetary policy

Policy to reduce inflation during economic growth.

Traditional monetary policy

Includes open market operations and reserve requirements.

Nontraditional monetary policy

Includes quantitative easing and forward guidance.

Federal funds rate

Interest rate for loans between banks.

Interest-on-reserve-balance rate

Rate paid on reserves held by banks at the Fed.

Initial margin requirement

Percentage of purchase price covered by investor's funds.

Asset bubble

Rapid price increase of assets beyond intrinsic value.

Timing lags

Delays in monetary policy effects on the economy.

Cyclical asymmetry

Different impacts of monetary policy during expansions vs. recessions.

Negative supply shocks

Unexpected events reducing supply, raising prices.

Money supply rule

Rule-based approach for controlling money supply.

Inflation targeting

Setting specific inflation rate goals for monetary policy.

Taylor rule

Formula for setting interest rates based on economic conditions.

Currency pair

Simultaneous purchase of one currency and sale of another.

Exchange rate

Rate at which one currency is exchanged for another.

Currency appreciation

Requires fewer units of currency to buy foreign currency.

Currency depreciation

Requires more units of currency to buy foreign currency.

Exchange Rate Index

Measures dollar value against a basket of currencies.

Hedging

Financial strategy to protect against value loss.

Speculator

Individual or firm accepting risk for profit.

Long-run Exchange Value

Determined by price levels and trade barriers.

Short-run Exchange Rate

Affected by interest rates and market expectations.

Forecasting Methods

Includes quantitative, judgmental, and technical forecasting.

International Banking

Involves cross-border loans and deposits.

Country Risk

Risk associated with international banking operations.

Currency Risk

Risk of currency value fluctuations affecting banks.

Trade Lending Facilities

Includes letters of credit and banker's acceptance.

Export-Import Bank (EXIM)

Supports U.S. exports to facilitate job creation.

Exchange Rate Systems

Classified as hard peg, soft peg, managed, free float.

Floating Exchange Rate

Price determined by supply and demand forces.

Advantages of Floating Rates

Administrative simplicity and quick market response.

Disadvantages of Floating Rates

Erratic fluctuations may reduce trade and investment.

Managed Float

Central bank intervenes to stabilize exchange rates.

Fixed Exchange Rates

Used by developing nations for stability.

Currency Crisis

Doubt about central bank's foreign reserves adequacy.

Closed Economy Impact

Expansionary monetary policy raises domestic demand.

Open Economy Impact

Monetary policy affects aggregate demand via net exports.

Bretton Woods Agreement

Established fixed exchange rates from 1944 to 1971.

Gold Standard

Fixed exchange rate system from 1879 to 1934.

Eurozone

Example of managed floating exchange rate system.