central bank Flashcards
what is the role of a central bank
issue bank notes: print money, put it into circulation and can withdraw and destroy them, set interest rates for commercial banks, monitor and reduce inflation; in bad times central banks buys govnm’t bonds to help finance sovereign debt more cheaply; also helps supervision of commercial banks. when the economy is in a slowdown the Central bank would try to increase business activities by doing expansionary monetary policy.
what is the relationship between commercial banks and a central bank
The commercial banks must maintain a minimum deposit, pay an interest rate set by the central bank. They can borrow money from the central bank.
What is monetary policy
the actions undertaken by a central bank, to influence the availability and cost of money and credit to help promote national economic goals; there are three tools of monetary policy: open market operations, discount rate, and reserve requirements.
Key Lending rate
the interest rate that the central bank sets; lowers this when they want to encourage spending; lowering results in lower interest rates from commercial banks, makes borrowing cheaper.
Inflation
price increase of goods and fall in the purchasing value of money; use baseline year to confirm whether there has been growth in production/gdp; ex. when the money circulating threatens to grow faster than the real economy.
Purchasing Power Parity
Set of international prices used to compare exchange rates
Signorage
profit from money lending; only commercial banks receive loans with the interest rates, influenced by the economy
Unorthodox methods
keeping rate well below inflation, key lending rate extremely low, buying government bonds in large volumes: keeps bond markets solvent and pushes interest rates down; quantitative easing
Quantitative easing
printing money to purchase assets from the market; large scale open market operation; purchasing treasury bills and bonds to increase money supply. increase in money supply means banks have more cash lowering its value because its easy to come by. they in turn compete to earn interest on the increased supply offering the public lower and lower rates… decreasing the cost of borrowing & encouraging spending.
Fiscal Policy
Government spending to improve the economy: infrastructure, innovation, etc.
Federal Fund Rate
rate at which commercial banks can lend to each other using their reserve required by the fed; interest rate at which depository institutions lend reserve balances to other depository institutions overnight on an uncollateralized basis
Open Market Operations
When the central bank inserts itself into the market by purchasing securities and assets to stimulate the economy.
yield
income/price (interest or dividends divided by price received from purchasing an asset); the income returned on an investment, such as the interest received from holding a security
how does yield affect fiscal policy
by bidding up treasury bills and bonds, the yield price goes down (interest rate stays the same but price of bond increases) when they buy up the property, they cause a lower yield which lowers the governments cost of borrowing, allowing them to spend more.
Reserve balances
amounts held at the Federal Reserve to maintain depository institutions’ reserve requirements
Federal Open Market Committee
determine open market operations; 12 members–the 7 members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and 4 of the remaining 11 Reserve Bank presidents, who serve 1yr terms on a rotating basis
The Board of Governors of the Federal Reserve System
determine the discount rate and reserve requirements
Currency Crisis
devaluation of currency; abrupt depreciation of currency in a short time
Exchange rate arrangements
- Floating arrangement
- Fixed arrangement
- intermediate arrangement
Floating arrangement
no commitment to maintain a certain level of the exchange rate.
Fixed arrangement
committed to maintaining the exchange rate at a certain level
Clean float
No commitment to maintain a certain level of the exchange rate.
Intermediate arrangement
pegs the exchange rate to foreign currency or a set of currencies allowing some degrees of flexibility
Hard peg
a commitment that is irrevocable and set by law.
