Monetary Policy and the Money Supply

Key vocabulary terms and definitions detailing the objectives, instruments, and applications of monetary policy and central banking.

Monetary Policy

A method used to manage the economy, usually directed by a central bank, with the objectives of controlling inflation while supporting employment levels.

Federal Reserve Bank

The central bank in the United States responsible for overseeing monetary policy and controlling the quantity of money circulating in the economy.

Interest

The cost or price of money, which an individual receives when saving money in a bank or pays when borrowing money.

Federal Funds Rate

The target interest rate determined by the central bank for commercial banks lending to one another.

Money Supply

The circulating financial assets in an economy, primarily consisting of bank deposits and easily convertible securities, with notes and coins forming only a minor part.

Open Market Operations

The primary tool used to control the money supply, involving the central bank buying or selling government bonds in the open market.

Expansionary Monetary Policy

The strategy of stimulating the economy by increasing the money supply, such as when the central bank buys government bonds from investors.

Contractionary Monetary Policy

The reduction of the money supply through the sale of central bank-owned bonds, typically implemented in response to inflation concerns.

Discount Rate

The interest rate that the central bank charges other banks when lending to them.

Reserve Ratio Requirement

The percentage of total deposits that a bank is required to hold in reserve instead of circulating into the economy.