Unit 4 Monetary Policy

Federal Open Market Committee

the 12 member group that determines the purchase and sale of the Federal Reserve Banks in the market for U.S. government securities

Federal Reserve districts

The 12 banking districts which are served by a Federal Reserve district bank

excess reserves

reserves greater than the required amounts

required reserve ratio

The minimum fraction of deposits banks are required by law to keep as reserves

bank reserves

the currency banks hold in their vaults plus their deposits at the Federal Reserve

government securities

bonds or other promissory certificates issued by the government

open market operations

the purchase and sale of U.S. government bonds by the Fed

demand deposit

the money in checking accounts

money multiplier formula

1/required reserve ratio

monetary policy

Federal Reserve decisions that shape the economy by influencing interest rates and the supply of money

federal funds rate

the interest rate at which banks make overnight loans to one another

discount rate

The interest rate on the loans that the Fed makes to banks

Monetary Policy Tools

1. open market operations

2. discount rate

3. reserve requirements

money supply

all the money available in the United States economy

M1 money supply

includes all currency plus checking accounts, savings accounts and traveler's checks

M2 money supply

Includes all of M1 money supply plus money market accounts, and certificates of deposit.

fiat money

money that has value because the government has ordered that it is an acceptable means to pay debts

commodity money

objects that have value in themselves such as good, silver, crude oil

Board of Governors

the seven-member board that oversees the Federal Reserve System

Liquidity

the ease with which an asset can be converted into cash

required reserves

the dollar amount of reserves a bank is obligated by regulation to hold

bank run

A situation in which many depositors simultaneously decide to withdraw money from a bank

medium of exchange

anything that is used to determine value during the exchange of goods and services

unit of account

a means for comparing the values of goods and services

monetary base

the sum of currency in circulation and bank reserves

velocity of money

the rate at which money changes hands

quantity theory of money formula

MV=PQ

nominal interest rate

the interest rate as usually reported without a correction for the effects of inflation

Money Demand

the amount that households and firms want to hold in currency and deposits

Money Market Graph

Supply of money vertical and demand for money downward sloping

Reserve Market Graph

Graph depict the supply of reserves and the demand for reserves in the market. Ample vs limited is used to determine how to conduct MP

Policy rate

An interest rate that a central bank sets and announces publicly; normally the rate at which it is willing to lend money to the commercial banks.

expansionary monetary policy

monetary policy that increases aggregate demand by decreasing interest rates

contractionary monetary policy

monetary policy that reduces aggregate demand by increasing the interest rates