The Role of the Fed

A collection of flashcards that cover key vocabulary and concepts related to the role of the Federal Reserve and its monetary policy.

Federal Reserve System

The central bank of the United States responsible for managing the nation's money.

Monetary Policy

Actions by the Fed to manage interest rates and the money supply to influence economic growth, inflation, and employment.

Open-Market Operations

The primary tool used by the Fed to influence the money supply by buying or selling government bonds.

Federal Funds Rate (FFR)

The rate commercial banks charge each other for short-term loans, typically overnight.

Liquidity Preference

The demand for money, reflecting how much wealth people prefer to hold in liquid form.

Opportunity Cost of Holding Money

The potential earnings lost when money is held instead of being invested in interest-bearing assets.

Expansionary Gap

When the economy's actual output is above its potential output, leading to overheating and inflation.

Quantitative Easing (QE)

A monetary policy where the Fed buys long-term financial assets to increase bank reserves and lower long-term interest rates.

Zero Lower Bound (ZLB)

The situation where short-term nominal interest rates are at or near zero, limiting the effectiveness of traditional monetary policy.

Equilibrium Interest Rate

The interest rate at which money supply equals money demand in the economy.

Demand for Money

The amount of wealth that people prefer to hold in the form of money rather than other assets.

Reserve Requirements

The minimum percentage of deposits that banks must hold in reserve, affecting their ability to lend.

Interest Rate Decisions

The process by which the Fed adjusts interest rates to influence the economy.

Borrowing Costs

The expenses associated with taking loans, which are directly affected by interest rates set by the Fed.

Federal Open Market Committee (FOMC)

The policymaking body of the Fed that controls the supply of money in the economy.

Interest-Bearing Assets

Investments that earn interest over time, including savings accounts, bonds, and stocks.

Financial Stability

The Fed's role in supervising banks and preventing crises in the financial system.

Payment System

The infrastructure provided by the Fed to ensure secure and efficient payment and settlement services.

Adjustment Process

The method through which the economy returns to equilibrium after a change in interest rates.

Marginal Cost of Holding Money

The costs associated with holding money that could be earning returns if invested in other assets.

Stabilizing the Economy

The Fed's primary objective through monetary policy to mitigate recessions and control inflation.