Final Exam Vocab Flashcards
Open Market Operations
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
Federal Funds Rate
Interest rate on overnight loans from one bank to another
Tightening of Monetary Policy
A rise in the Federal Funds Rate
Easing of Monetary Policy
a lowering of the Federal Funds Rate
Instrument Independence
ability of the central bank to set monetary policy instruments (FED= yes)
Goal Indepedence
ability of the central bank to set the goals of monetary policy (FED= yes)
Political Business Cycle
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
Monetary Base
US Treasury’s Monetary Liabilities (coins) + Federal Reserves Monetary Liabilities (currency in circulation and reserves)
- ignore T’s ML
- also called “High Powered Money”
Reserves
deposits at the Fed + currency that is physically held by banks- vault cash
- required reserves + excess reserves
Discount Rate
interest rate charged to banking institutions for loans during normal times
Nonborrowed Monetary Base
- results primarily from Open Market Operations
- Fed controls
- the monetary base- borrowings from Fed
Borrowed Reserves
A bank’s borrowings of the Fed
Multiple Deposit Creation
The process by which the Fed supplies the banking system with $1 of additional reserves, deposits increase by a multiple of this amount
Simple Deposit Multiplier
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
Money Multiplier
(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
Dynamic Open Market Operations
intended to change the level of reserves and monetary base
Defensive Open Market Operations
intended to offset movements in other factors that affect reserves and the monetary base
Primary Dealers
specific set of dealers in government securities through which open market operations are conducted
Repurchase Agreement (REPO)
- 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
Matched Sale-Purchase Transaction (Reverse REPO)
- Fed sells securities and buyer agrees to sell them back to the Fed in the near future
Discount Window
facility at which banks can borrow reserves from the Federal Reserve
Standing Lending Facility
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
Secondary Credit
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
Lender of Last Resort
prevent bank failures from spinning out of control, provides reserves to banks when no one else will
Zero-Lower Bound Problem
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
Quantitative Easing
Expansion of the Balance Sheet, leads to huge increase in MB
Credit Easing
Altering the composition of the Fed’s balance sheet in order to improve the functioning of particular segments of credit markets
Price Stability
low and stable inflation
Nominal Anchor
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
Time Inconsistency Problem
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
Natural Rate of Unemployment
demand for labor equals supply of labor
Natural Rate of Output/ Potential Output
a level of output produced at the natural rate of unemployment
Hierarchical Mandates
put the goal of price stability first, then say as long as it is achieved other goals can be pursued
Dual Mandate
central bank must pursue two equal coequal objectives: price stability and maximum employment
Inflation Targeting
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
Macroprudential Regulation
regulatory policy to affect what is happening in credit markets in the aggregate
Policy Instrument (“Operating Instrument”)
a variable that responds to the central bank’s tools and indicates the stance of monetary policy
Intermediate Target
Intermediate targets that stand between the policy instrument and goals of the Monetary policy
- M2, L-term interest rates
Exchange Rate
Price of one currency in terms of another
Spot Transactions
immediate exchange of bank deposits
Forward Transactions
exchange of bank deposits at some specified future date
Law of One Price
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
Theory of Purchasing Power Parity
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
Real Exchange Rate
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
