Final Exam Vocab

Question 1

Open Market Operations

Answer 1

the purchase and sale of government securities that affect both interest rates and amount of reserves in the banking system

• purchase: purchase of bonds by Fed
• sale: sale of bonds by the Fed

Question 2

Federal Funds Rate

Answer 2

Interest rate on overnight loans from one bank to another

Question 3

Tightening of Monetary Policy

Answer 3

A rise in the Federal Funds Rate

Question 4

Easing of Monetary Policy

Answer 4

a lowering of the Federal Funds Rate

Question 5

Instrument Independence

Answer 5

ability of the central bank to set monetary policy instruments (FED= yes)

Question 6

Goal Indepedence

Answer 6

ability of the central bank to set the goals of monetary policy (FED= yes)

Question 7

Political Business Cycle

Answer 7

Just before an election, expansionary policies are pursued to lower unemployment and interest rates. After the election, the bad effects of these policies (high inflation and interest rates), requiring contractionary policies.
- case for Fed independence

Question 8

Monetary Base

Answer 8

US Treasury’s Monetary Liabilities (coins) + Federal Reserves Monetary Liabilities (currency in circulation and reserves)

• ignore T’s ML
• also called “High Powered Money”

Question 9

Reserves

Answer 9

deposits at the Fed + currency that is physically held by banks- vault cash
- required reserves + excess reserves

Question 10

Discount Rate

Answer 10

interest rate charged to banking institutions for loans during normal times

Question 11

Nonborrowed Monetary Base

Answer 11

• results primarily from Open Market Operations
• Fed controls
• the monetary base- borrowings from Fed

Question 12

Borrowed Reserves

Answer 12

A bank’s borrowings of the Fed

Question 13

Multiple Deposit Creation

Answer 13

The process by which the Fed supplies the banking system with $1 of additional reserves, deposits increase by a multiple of this amount

Question 14

Simple Deposit Multiplier

Answer 14

the multiple increase in deposits generated from an increase in the banking system’s reserves
- the reciprocal of the required reserve ratio= (1/rr)*change in reserves

Question 15

Money Multiplier

Answer 15

(1+c)/ (rr+ e + c)

• c= currency ratio set by depositors
• e = excess reserves ratio set by banks
• rr = required reserve ratio set by Fed

Question 16

Dynamic Open Market Operations

Answer 16

intended to change the level of reserves and monetary base

Question 17

Defensive Open Market Operations

Answer 17

intended to offset movements in other factors that affect reserves and the monetary base

Question 18

Primary Dealers

Answer 18

specific set of dealers in government securities through which open market operations are conducted

Question 19

Repurchase Agreement (REPO)

Answer 19

• the Fed purchases securities with an agreement that the seller will repurchase them in a short period of time (1-15 days)
• temporary Open Market Purchase
• Defensive action

Question 20

Matched Sale-Purchase Transaction (Reverse REPO)

Answer 20

• Fed sells securities and buyer agrees to sell them back to the Fed in the near future

Question 21

Discount Window

Answer 21

facility at which banks can borrow reserves from the Federal Reserve

Question 22

Standing Lending Facility

Answer 22

primary credit facility where healthy banks are allowed to borrow all they want at very short maturities

• higher than Federal Funds Rate
• back up source of liquidity for sound banks

Question 23

Secondary Credit

Answer 23

Fed’s discount window credit given to banks that are in financial trouble and are experiencing severe liquidity problems
- higher penalty rate than Federal Funds Rate

Question 24

Lender of Last Resort

Answer 24

prevent bank failures from spinning out of control, provides reserves to banks when no one else will

Question 25

Zero-Lower Bound Problem

Answer 25

the central bank in unable to lower short-term interest rates further because they have hit a floor of zero - ppl can always earn more from holding bonds than holding cash, nominal IR cannot be negative

Question 26

Quantitative Easing

Answer 26

Expansion of the Balance Sheet, leads to huge increase in MB

Question 27

Credit Easing

Answer 27

Altering the composition of the Fed's balance sheet in order to improve the functioning of particular segments of credit markets

Question 28

Price Stability

Answer 28

low and stable inflation

Question 29

Nominal Anchor

Answer 29

a nominal variable such as the inflation rate or the money supply - ties down the price level to achieve price stability - used in monetary policy

Question 30

Time Inconsistency Problem

Answer 30

occurs when monetary policymakers conduct monetary policy in a discretionary way and pursue expansionary policies that are attractive in the short run but lead to bad long run outcomes

Question 31

Natural Rate of Unemployment

Answer 31

demand for labor equals supply of labor

Question 32

Natural Rate of Output/ Potential Output

Answer 32

a level of output produced at the natural rate of unemployment

Question 33

Hierarchical Mandates

Answer 33

put the goal of price stability first, then say as long as it is achieved other goals can be pursued

Question 34

Dual Mandate

Answer 34

central bank must pursue two equal coequal objectives: price stability and maximum employment

Question 35

Inflation Targeting

Answer 35

1) public announcement of medium-term targets for inflation 2) institutional commitment to price stability as primary, LR goal of monetary policy 3) an information-inclusive approach in which many variable are used in decision-making process 4) increased transparency of MP, communication 5) increased accountability of central bank for attaining inflation objectives

Question 36

Macroprudential Regulation

Answer 36

regulatory policy to affect what is happening in credit markets in the aggregate

Question 37

Policy Instrument ("Operating Instrument")

Answer 37

a variable that responds to the central bank's tools and indicates the stance of monetary policy

Question 38

Intermediate Target

Answer 38

Intermediate targets that stand between the policy instrument and goals of the Monetary policy - M2, L-term interest rates

Question 39

Exchange Rate

Answer 39

Price of one currency in terms of another

Question 40

Spot Transactions

Answer 40

immediate exchange of bank deposits

Question 41

Forward Transactions

Answer 41

exchange of bank deposits at some specified future date

Question 42

Law of One Price

Answer 42

If two countries produce an identical good, transportation costs and trade barriers are very low, price of the good should be the same throughout the world no matter what country produces

Question 43

Theory of Purchasing Power Parity

Answer 43

Exchanges rates between any two currencies will adjust to reflect changes in the price levels of the two countries - application of law of one price to national price levels

Question 44

Real Exchange Rate

Answer 44

the rate at which domestic goods can be exchanged for foreign goods - the price of domestic goods relative to the price of foreign goods denominated in domestic currency