money and banking exam 4

Contractionary monetary policy

A strategy used by central banks to decrease the money supply and slow down the economy to combat inflation and raises interest rates.

Expansionary monetary policy

A strategy used by central banks to stimulate the economy by increasing the money supply and lowering interest rates.

Traditional monetary policy

the central banks approach to managing the money supply, primarily through adjusting a short term policy interest rate, like the federal funds rate.

nontraditional monetary policy

Central banks approach when its regular monetary tools are insufficient

What are the traditional monetary policy tools?

Open market operations, discount window, required reserve ratio

what are the nontraditional monetary policy tools

quantitative easing, forward guidance, Interest on bank reserves, negative interest rates

dynamic open market operation

Permanent long term actions by central bank to buy or sell securities to permanently add or drain reserves from the banking system

Defensive open market operations

central bank buying and selling government securities that are temporary in the bank reserves

limited reserve market

The supply of reserves are scarce, small changes in reserves had a large effect on the federal funds rate

ample reserve market

the supply of reserves are abundant, and changes in the qauntity if reserves have little to no effect on the federal funds rate

monetary policy “chain of events”

1. central banks decision and implementation

2. influence on interest rates

3. impact on spending and investment

4. effects on aggregate demand

5. influence on employment and prices

inflation targeting

stared in 2012, the federal reserve commits to adjusting the money supply as necessary to achieve a publicly announce inflation rate set at 2% per year

Taylor rule

a guideline for central banks to set interest rates based on inflation and economic output

monetary policy lags

when a change in monetary policy is implemented and when it affects the economy. Recognition, implementation, effect

rule based monetary policy

follows a set of certain rules such as taylor rule, gives us speed, flexibility, and political independence

discretionary monetary policy

allows central bank to make independent judgments and adjust policy based on their assessment of the current economic situation

monetary policy cases

1. The great inflation of the 1970s

2. 2001 attack on america

3. the great recession of 2007-2009

4. covid 19 pandemic

5. how the federal reserve and the US government got inflation wrong