Chapter 12. Monetary Policy and Bank Regulation
KEY TERMS
- administered rate
- an interest rate that is set directly rather than being influenced by the market forces of supply and demand
- arbitrage
- the simultaneous purchase and sale of a good in order to profit from a difference in price
- bank run
- when depositors race to the bank to withdraw their deposits for fear that otherwise they would be lost
- basic quantity equation of money
- money supply × velocity = nominal GDP
- central bank
- institution which conducts a nation’s monetary policy and regulates its banking system
- contractionary monetary policy
- a monetary policy that reduces the supply of money and loans
- countercyclical
- moving in the opposite direction of the business cycle of economic downturns and upswings
- deposit insurance
- an insurance system that makes sure depositors in a bank do not lose their money, even if the bank goes bankrupt
- discount rate
- the interest rate charged by the central bank on the loans that it gives to other commercial banks
- discount window
- a means of lending money to both banks and nondepositary financial institutions who are in financial trouble
- excess reserves
- reserves banks hold that exceed the legally mandated limit
- expansionary monetary policy
- a monetary policy that increases the supply of money and the quantity of loans
- federal funds rate
- the interest rate at which one bank lends funds to another bank overnight
- inflation targeting
- a rule that the central bank is required to focus only on keeping inflation low
- Interest Rate of Reserve Balances – IORB
- interest rate paid on excess reserves that are deposited at the Federal Reserve Bank
- lender of last resort
- an institution that provides short-term emergency loans in conditions of financial crisis
- loose monetary policy
- see expansionary monetary policy
- mortgage-backed securities
- debt obligations, such as bonds, that represent claims on the interest and principal payments of residential mortgage loans. Most of these securities are issued by the government-sponsored enterprises Fannie Mae and Freddie Mac
- Overnight Reverse Repo Facility – ON RRP
- a form of open market operations where the Fed stands ready to interact with many nonbank financial institutions, such as large money market funds and government-sponsored enterprises
- open market operations
- the central bank selling or buying Treasury bonds to influence the quantity of money and the level of interest rates
- quantitative easing (QE)
- the purchase of long term government and private mortgage-backed securities by central banks to make credit available in hopes of stimulating aggregate demand
- repurchase agreements (repos)
- an overnight transaction in which the Federal Reserve sells a security to an eligible financial institution and simultaneously agrees to buy the security back the next day, temporarily increasing reserves in the banking system
- reserves
- the sum of cash that banks hold in their vaults and the deposits they maintain with Federal Reserve Banks (i.e., reserve balances)
- reserve requirement
- the percentage amount of its total deposits that a bank is legally obligated to either hold as cash in their vault or deposit with the central bank
- reverse repurchase agreements (reverse repos)
- an overnight transaction in which the Federal Reserve buys a security from an eligible financial institution and simultaneously agrees to sell the security back the next day, temporarily decreasing reserves in the banking system
- tight monetary policy
- see contractionary monetary policy
- U.S. Treasury securities
- bonds, notes, and other debt instruments sold by the U.S. Treasury to finance U.S. government operations
- velocity
- the speed with which money circulates through the economy; calculated as the nominal GDP divided by the money supply
- zero-bound interest rate
- the point when the short-term nominal interest rate is at or near zero limiting the central banks ability to stimulate the economy
