Monetary Policy Flashcards

Flashcards covering key concepts related to Monetary Policy, the Federal Reserve, and related economic principles.

Monetary Policy

Actions taken by a central bank to manipulate the money supply and credit conditions to stimulate or restrain economic activity.

Federal Reserve (The Fed)

The central bank of the United States, responsible for implementing monetary policy.

Jerome Powell

Current Chair of the Federal Reserve.

Market Confidence

The degree to which investors and consumers are optimistic about the economy.

Expansionary Monetary Policy

Monetary policy that increases aggregate demand; also called 'easy money policy.'

Contractionary Monetary Policy

Monetary policy that reduces aggregate demand; also called 'tight money policy.'

Federal Funds Rate

The target rate the Fed wants banks to charge one another for the overnight lending of reserves.

Taylor Rule

A rule proposed by economist John Taylor to target a federal funds rate based on inflation and unemployment.

Inflation Targeting

A monetary policy strategy where the central bank sets a specific inflation rate as a goal.

Asset Price Bubbles

A situation where the price of an asset rises rapidly and unsustainably.

Quantitative Easing

A monetary policy where a central bank purchases longer-term government bonds to lower long-term interest rates.

Monetary Neutrality

The idea that changes in the money supply only affect nominal variables (like prices and wages) in the long run, not real variables (like output and employment).

Opportunity Cost of Holding Money

The interest income foregone by holding money instead of an interest-bearing asset.

Money Demand Curve

A curve that shows the relationship between the interest rate and the quantity of money demanded.

Equilibrium Interest Rate

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

Target Federal Funds Rate

The Federal Reserve's desired federal funds rate.

Overnight Borrowing

The Fed borrows money overnight from financial institutions to increase the demand for overnight loans, which leads to higher interest rates.

Direct Lending

The Fed lends to banks directly through the discount window.

Open-Market Operations

The buying and selling of government bonds by the Fed to influence the money supply and interest rates.

Monetarism

An economic school of thought that emphasizes the role of the money supply in influencing economic activity.

Velocity of Money

The ratio of nominal GDP to the money supply; a measure of how many times the average dollar bill is spent each year.

Monetary Rule

A predetermined rule for monetary policy, such as targeting a specific growth rate for the money supply.

Nominal GDP rule

Keep Mv constant (or growing at a constant rate).