Federal Reserve/Monetary Policy Flashcards
Central Bank Activities
-Monitoring Financial Institutions
-Controlling certain key interest rates
-Indirectly controlling money supply
The federal bank’s dual mandate includes
-Maintaining low and predictable levels of inflation
-Maximum levels of sustainable levels of employment
Interbank Transfers
When one bank lends to another, this is processed by the central bank
Regulation
-Audits financial statements of large banks
-Performing stress-tests
Managing macroeconomic fluctuations
Manipulated the quantity of bank reserves,interest rates change
Federal Funds Rate
The interest rate in the federal funds market where banks obtain overnight loans or reserves from one another
When Federal Funds rate increases
Demand curve for reserves shifts to right
Demand Curve for Reserves Shifts
-Economic contraction or expansion
-Changing liquidity needs
-Changing Deposit Base
-Changing Reserve Requirements
-Changing Interest Rate for reserves in central bank
Open Market Operation
Exchange been private bank and Federal Reserve
Federal Reserve Faces trade off between
Inflation and unemployment
Increase in quantity of reserves leads to
Fall in federal funds rate
Long-term real interest rate formula
Long-term nominal interest rate - long term inflation rate
Quantitative Easing
Central bank purchases predetermined amounts of government bonds or other assets to stimulate economy
Federal Reserve Goals
Price level stability
Monetary Instruments Used by Fed
Federal Funds Rate
Expansionary Monetary Policy
Increase investment and consumption
What is included in bank reserves for private banks
-Vault cash
-Deposit at central bank
What is Liquidity
Funds that are available for immediate payment
Money Supply Increases When
Banks lend out a larger portion of their deposits
If Federal Reserve wants to decrease money supply what should it do
Sell government bonds
