Key Concepts in Monetary Policy and Banking

bank run

when depositors race to the bank to withdraw their deposits for fear that otherwise they would be lost

basic quantity equation of money

money supply × velocity = nominal GDP

central bank

institution which conducts a nation's monetary policy and regulates its banking system

contractionary monetary policy

a monetary policy that reduces the supply of money and loans

countercyclical

moving in the opposite direction of the business cycle of economic downturns and upswings

deposit insurance

an insurance system that makes sure depositors in a bank do not lose their money, even if the bank goes bankrupt

discount rate

the interest rate charged by the central bank on the loans that it gives to other commercial banks

excess reserves

reserves banks hold that exceed the legally mandated limit

expansionary monetary policy

a monetary policy that increases the supply of money and the quantity of loans

federal funds rate

the interest rate at which one bank lends funds to another bank overnight

inflation targeting

a rule that the central bank is required to focus only on keeping inflation low

interest rate on reserve balances (IORB)

the interest the Federal Reserve pays banks on their reserves held at their Federal Reserve bank

lender of last resort

an institution that provides short-term emergency loans in conditions of financial crisis

loose monetary policy

see expansionary monetary policy

open market operations

the central bank selling or buying Treasury bonds to influence the quantity of money and the level of interest rates

quantitative easing (QE)

the purchase of long term government and private mortgage-backed securities by central banks to make credit available in hopes of stimulating aggregate demand

reserve requirement

the percentage amount of its total deposits that a bank is legally obligated to either hold as cash in their vault or deposit with the central bank

tight monetary policy

see contractionary monetary policy

velocity

the speed with which money circulates through the economy; calculated as the nominal GDP divided by the money supply