Monetary policy (limited reserves)

Money market

A market in which the demand for and supply of money determine an interest rate or opportunity cost of holding money balances

Monetary policy (limited reserves)

The actions taken by a country’s central bank to influence the suply of money and credit in the economy

Investment demand

The negative relationship between the quantity of new physical capital demanded by firms and the prevailing interest rate

Expansionary monetary policy (limited reserves)

the actions taken by a coutnrys central bank to expand the money supply and lower interest rates with the objective of increasing real GDP and reducint unemployment

Contractionary monetary policy (limited reserves)

the actions taken by a countrys central bank to contract the money suplly and raise interest rates with the objective of decreasing real GDP and controlling inflation

Open market operations

The purchase or sale of government securieties by a central bank; a key tool of monetary policy used to influence the money supply and interest rates

Reserve Requirement (rr)

The fraction of checkable deposits that banks must keep on hand as reserves, either as currency or on deposit with the Federal Reserve

Federal Open Market Committee

A committee of the Federal Reserve Sydtem that is responsible for monetary policy decisions specificall for open market operations for the federal reserve system

Change in Money Supply formula

Change in money supply = 1/rr x Change in reserves

Contractionary monetary policy (limited reserves)

The actions taken by a country’s central bank to contract the money supply and raise interest rates with the objjective of decreasing real GDP and controlling inflation

Discount rate

The interest rate at which banks can borrow money directly from the Federal Reserve

Required reserves

The amount of reserves that a bank must keep on hand to meet regulatory requirements; equal to total reserves minus required reserves

Excess reserves

The amount of reserves that a bank can lend out to earn interes; equal to total reserves minus required reserves

Spread

The difference between the interest rate a bank earns on a loan and the interest rate it pays

Federal funds market (limited reserves)

The market for borrowing and lending reserves between banks

Federal funds rate

The interest rate that banks pay when borrowing reserves from other banks

Prime rate

The lowest commercially available interest rate

Money market equilibrium

Money supply = money demand

Excess reserves

Excess reserves = total reserves - required reserves

Change in money supply (Excess reserves)

Change in money supply = -1/rr x Change in excess reserves

Cyclical asymmetry

The idea that the aggregate demand for goods and services is more responsive to contractionary monetary policy than to expansionary monetary policy

Liquidity trap

A situation in which increasing the money supply does not lower interest rates due to a flattening of the money demand curve