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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.
