Chapter 15: Monetary Policy and Banking Regulation

Discount loans

Loans the Fed makes to banks

Discount rate

The interest rate the fed charges on the loans

Federal funds rate

Interest rate at which banks lend to one another on an overnight basis to meet federal reserve requirements

Open market operations

•Not a primary tool for the Fed but used to maintain ample reserves.

•Expansionary open market operation

-the Fed buys bonds from the banks or public.

-pay for the bonds by adding money to the banking system which increases bank reserves

Contractionary open market operation

-banks or investors buy bonds from the Fed

-the money they pay goes out of the banking system

Reserve requirements

Percentage of deposits that banks must hold

-limits how much banks can lend out

This directly affects how much money the banking system can create

-they influence the money multiplier

A higher reserve require—banks lend less——smaller money supply

A lower reserve requirement—banks lend more—-larger money supply

-they help maintain stability

Banks need enough reserves to meet withdrawal demand, reducing the risks of bank runs

Required reserves

Funds depository institutions must hold in reserves

Excess reserves

Funds that a depository institution holds in excess of its required reserve balance

Quantitative easing

The federal reserve buys a large amount of assets-

Quantitative tightening

IORB rate

The interest rate that banks earn from the Fed on funds they deposit into their reserve balance accounts

Reservation Rate

The interest rate that banks earn from the Fed on funds they deposit into their reserve balance accounts

Arbitrage

ON RRP rate

Foward guidance

What is the structure of the Fed? What is the struggle of the Board of governors? What is the structure of the Federal Open Market Committee?

What decisions do the Board of Governors make, what decisions does the Federal Open Market Committee make?

What is the role of the central bank?

What tools did the Federal Reserve use under a limited reserve regime versus and ample reserve regime?

When were we operating under a limited reserve regime and what changed?

Before 2008 limited reserve regime were there was a required reserve amount however afterwards years later free regime made the required reserve 0.

How does the reserve market change when the Fed makes policy changes?

What are the two concepts hay IROB relies on, and how do they influence the federal funds rate?

What is the ON RRP rate, and how does it differ from the IROB rate?

What is the role of forward guidance, and how does it influence expectations regarding inflation?

What expectations regarding inflation impact the Philips curve, wages, and the aggregate market?

When would expansionary monetary policy be implemented, when would contractionary monetary policy be implemented, and how does it influence the aggregate market and the Phillips curve?