Chapter 33: Interest Rates and Monetary Policy

Monetary policy

Consists of deliberate changes in the money supply to influence interest rates and thus the total level of spending in the economy

Interest

The price paid for the use of money

Transactions demand

The demand for money as a medium of exchange

higher interest rate

The ________ will discourage investment, lowering aggregate demand and restraining demand- pull inflation.

Asset demand

Holding money as an asset

Total demand for money

The total amount of money the public wants to hold, both for transactions and as an asset, at each possible interest rate

Open market operations

Buying of government bonds from, or the selling of government bonds to, commercial banks and the general public

Reserve ratio

Can be manipulated in order to influence the ability of commercial banks to lend

Discount rate

Federal Reserve Banks charge interest on loans they grant to commercial banks

Term auction facility

The Fed holds two auctions each month at which banks bid for the right to borrow reserves for 28-day periods

Federal funds rate

The rate of interest that banks charge one another on overnight loans made from temporary excess reserves

Expansionary monetary policy

Lower the interest rate to bolster borrowing and spending, which will increase aggregate demand and expand real output

Prime interest rate

The benchmark interest rate used by banks as a reference point for a wide range of interest rates charged on loans to businesses and individuals

Restrictive monetary policy

Increase the interest rate in order to reduce borrowing and spending, which will curtail the expansion of aggregate demand and hold down price-level increases

Taylor rule

Assumes that the Fed has a 2 percent “target rate of inflation” that it is willing to tolerate

Monetary policy

Consists of deliberate changes in the money supply to influence interest rates and thus the total level of spending in the economy

Interest

The price paid for the use of money

Transactions demand

The demand for money as a medium of exchange

Asset demand

Holding money as an asset

Total demand for money

The total amount of money the public wants to hold, both for transactions and as an asset, at each possible interest rate

Securities

Government bonds that have been purchased by the Federal Reserve Banks

Reserves of commercial banks

he Fed requires that the commercial banks hold reserves against their checkable deposits

Open market operations

Buying of government bonds from, or the selling of government bonds to, commercial banks and the general public

Reserve ratio

Can be manipulated in order to influence the ability of commercial banks to lend

Discount rate

Federal Reserve Banks charge interest on loans they grant to commercial banks

Term auction facility

The Fed holds two auctions each month at which banks bid for the right to borrow reserves for 28-day periods

Federal funds rate

The rate of interest that banks charge one another on overnight loans made from temporary excess reserves

Expansionary monetary policy

Lower the interest rate to bolster borrowing and spending, which will increase aggregate demand and expand real output

Prime interest rate

The benchmark interest rate used by banks as a reference point for a wide range of interest rates charged on loans to businesses and individuals

Restrictive monetary policy

Increase the interest rate in order to reduce borrowing and spending, which will curtail the expansion of aggregate demand and hold down price-level increases

Taylor rule

Assumes that the Fed has a 2 percent "target rate of inflation" that it is willing to tolerate

Monetary policy

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