AP Macroeconomics Chapter 34

monetary policy

central bank changing money supply to influence interest and achieve price level stability, full employment, and economic growth

transactions demand for money

amount of money people want to have to us as medium of exchange

asset demand for money

amount of money people want to have as store of value

total demand for money

sum of transactions and asset demand for money

open market operations

buying and selling securities under the fed to influence interest rates and monetary supply

discount rate

interest rate fed charges on loans to other banks

prime interest rate

benchmark interest rate that banks use as a reference for loans

forward commitment

policy by central bank to continue to pursue monetary policy until a certain date or threshold

cyclical asymmetry

idea that monetary policy may be more successful in slowing expansions and controlling inflation then pulling economy out of large recession

liquidity trap

in recession when central bank makes an injection that has little to no effect; when interest rates are low, but citizens are hoarding cash

federal funds rate

interest rate banks charge each other on overnight loans

shifters of money demanded

technology, income, price levels

shifters of money supplied

reserve ratio, discount rate, open market operations, and interest rate on reserves held in the fed

buying v selling bonds

buy: expansionary, sell: contractionary

increase v decrease RRR

increased ratio: contractionary, decreased ratio: expansionary

increase v decrease discount rate

increased rate: contractionary, decreased rate: expansionary

increase v decrease interest on bank reserves

increased percentage: contractionary, decreased percentage: expansionary

easy money

lower interest rates, buy bonds lower RRR, lower discount rate

tight money

increase interest rates, sell bonds, increase RRR, increase discount rate

monetary policy over fiscal policy

speed and flexibility, isolation from political pressure