Chapter 23 - Monetary policy & the Federal Reserve

Reserve requirements

: set by the Fed, the minimum values of the ratio of bank reserves to bank deposits that commercial banks are allowed to maintain.

Quantitative easing

(QE): expansionary monetary policy in which a central bank buys financial assets from private financial institutions, thereby lowering the yield or return of those assets while increasing the money supply.

Reserve requirements

: set by the Fed, the minimum values of the ratio of bank reserves to bank deposits that commercial banks are allowed to maintain.

Quantitative easing

(QE): expansionary monetary policy in which a central bank buys financial assets from private financial institutions, thereby lowering the yield or return of those assets while increasing the money supply.

Federal Reserve

The controls the nominal interest rate by changing the supply of money.

real interest

To fight a recession (a recessionary output gap), the Fed lowers the rate, stimulating planned spending and output.

Federal Open Market Committee

(FOMC): committee that makes decisions concerning monetary policy.

Discount

window lending: lending of reserves by the Federal Reserve to commercial banks.

allocation decision

Portfolio : decision about the forms in which to hold one's wealth.

Deposit insurance

: system under which the government guarantees that depositors will not lose any money even if their bank goes bankrupt.

reserve requirements

An increase in discount window lending, a reduction in , a decrease in the interest rate paid on required reserves, or quantitative easing will all have the same effect.

real interest

Through its control of the rate, the Fed is able to influence planned spending and short- run equilibrium output.

real interest

An increase in the rate reduces both consumption spending and planned investment spending.

Board of Governors

leadership of the Fed, consisting of seven governors appointed by the president to staggered 14-year terms

Federal Open Market Committee (FOMC)

committee that makes decisions concerning monetary policy

Banking panic

situation in which news or rumors of the imminent bankruptcy of one or more banks leads bank depositors to rush to withdraw their funds

Deposit insurance

system under which the government guarantees that depositors will not lose any money even if their bank goes bankrupt

Federal funds rate

interest rate that commercial banks charge each other for very short-term (usually over night) loans; because the Fed frequently sets its policy in terms of the federal funds rate, this rate is closely watched in financial markets

Portfolio allocation decision

decision about the forms in which to hold one's wealth

Demand for money

amount of wealth an individual or firm chooses to hold in the form of money

Money demand curve

curve that shows the relation ship between the aggregate quantity of money demanded M and the nominal interest i; rate i; because an increase in the nominal interest rate in creases the opportunity cost of holding money, which re duces the quantity of money demanded, the money demand curve slopes down

Discount window lending

lending of reserves by the Federal Reserve to commercial banks

Discount rate = primary credit rate

interest rate that the Fed charges commercial banks to borrow reserves

Reserve requirements

set by the Fed, the minimum values of the ratio of bank reserves to bank deposits that commercial banks are allowed to maintain

Quantitative easing (QE)

expansionary monetary policy in which a central bank buys financial assets from private financial institutions, thereby lowering the yield or return of those assets while increasing the money supply

Board of Governors

Leadership of the Fed, consisting of seven governors appointed by the president to staggered 14-year terms

Federal Open Market Committee (FOMC)

Committee that makes decisions concerning monetary policy

Banking panic

Situation in which news or rumors of the imminent bankruptcy of one or more banks leads bank depositors to rush to withdraw their funds

Deposit insurance

System under which the government guarantees that depositors will not lose any money even if their bank goes bankrupt

Federal funds rate

Interest rate that commercial banks charge each other for very short-term (usually over night) loans; because the Fed frequently sets its policy in terms of the federal funds rate, this rate is closely watched in financial markets

Portfolio allocation decision

Decision about the forms in which to hold one's wealth

Demand for money

Amount of wealth an individual or firm chooses to hold in the form of money

Money demand curve

Curve that shows the relation ship between the aggregate quantity of money demanded M and the nominal interest i: rate i; because an increase in the nominal
interest rate in creases the opportunity cost of holding money, which re duces the quantity of money demanded. the money demand curve slopes down

Discount window lending

Lending of reserves by the Federal Reserve to commercial banks

Discount rate = primary credit rate

Interest rate that the Fed charges commercial banks to borrow reserves

Reserve requirements

Set by the Fed, the minimum values of the ratio of bank reserves to bank deposits that commercial banks are allowed to maintain

Quantitative easing (QE)

Expansionary monetary policy in which a central bank buys financial assets from private financial institutions, thereby lowering the yield or return of those assets while increasing the money supply