CH 30 Monetary Policy

Monetary Policy

The process by which the Federal Reserve manages the money supply to achieve specific goals such as controlling inflation and stabilizing currency.

Liquidity Preference Model

A theory that suggests the interest rate is determined by the supply and demand for money.

Money Demand Curve

Shows the relationship between the quantity of money demanded and the interest rate.

Opportunity Cost of Holding Money

The interest income forgone by holding cash instead of interest-bearing assets like bonds.

Short-term Interest Rates

Interest rates on financial assets that mature within six months or less.

Long-term Interest Rates

Interest rates on financial assets that mature over a number of years.

Expansionary Monetary Policy

Monetary policy that increases aggregate demand, also referred to as 'easy money policy'.

Contractionary Monetary Policy

Monetary policy that reduces aggregate demand, also referred to as 'tight money policy'.

Federal Funds Rate

The interest rate at which depository institutions trade federal funds with each other, typically over a very short term.

Taylor Rule

A monetary policy guideline for setting interest rates based on inflation and the output gap.

Inflation Targeting

A central bank's commitment to keep inflation within a specified range.

Monetary Neutrality

The theory that changes in the money supply do not affect real economic variables like output in the long run.

Quantitative Easing

A non-traditional monetary policy used by central banks, in which they purchase longer-term government bonds to inject money into the economy.

Aggregate Demand

The total demand for goods and services within a particular market.

Interest Rate

The amount charged by lenders to borrowers for the use of money, typically expressed as a percentage of the principal.

Equilibrium Interest Rate

The interest rate at which the quantity of money demanded equals the quantity of money supplied.