Ch. 12 Stabilizing the Economy: The Role of Federal Reserve

Question 1

Deposit insurance

Answer 1

A system under which the government guarantees that depositors will not lose any money even if their bank goes bankrupt

Question 2

Federal Funds Rate

Answer 2

The interest rate that commercial banks charge each other for very short-term (overnight) loans; the Fed frequently sets its policy in terms of the federal funds rate, this rate is closely watched in financial markets

Question 3

Monetary policy rule

Answer 3

Describes how a central bank takes action in response to changes in the state of the economy

Question 4

Target inflation rate

Answer 4

The Fed’s long-run goal for inflation

Question 5

Target real interest rate

Answer 5

The Fed’s long-run goal for the real interest rate

Question 6

Demand for Money

Answer 6

The amount of wealth an individual chooses to hold in the form of money

Question 7

Money Demand Curve

Answer 7

Shows the relationship between the aggregate quantity of money demanded M and the nominal interest rate i; because an increase in the nominal interest rate increases the opportunity cost of holding money, reducing the quantity of money demand curve slopes down

Question 8

Discount lending

Answer 8

The lending of reserves by the Federal Reserve to commercial banks

Question 9

Discount rate

Answer 9

The interest rate that the Fed charges commercial banks to borrow reserves

Question 10

Reserve requirements

Answer 10

set by the Fed, the minimum values of the ratio of bank deposits that commercial banks are allowed to maintain