Chapter 18 Econ

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what are the 4 conventional monetary policy tools

1) target federal funds rate 2)discount rate 3)deposit rate 4)reserve requirement

the four conventional monetary policy tools, also known as monetary policy instruments are:

1) the target federal funds rate 2) the discount rate 3) the deposit rate 4) the reserve requirement

a 1% point increase in the inflation rate raises the target federal funds rate by

1.5% points

how many times did the FOMC lower its target rate from september 2007 to december 2008

10 times

The ECB provides reserves to the european banking system primarily through

collateralized loans in what are called refinancing operations

to be effective, forward guidance needs to be

credible

a good monetary policy instrument has 3 features

easily observable to everyone controllable and quickly changed tightly linked to the policymakers objectives

aims at lowering the long term interest rates that affect private spending

forward guidance

in which the central bank communicates its intentions regarding the future path of monetary policy

forward guidance

simplest unconventional approach a central bank can take is to provide

forward guidance

3 borad categories of unconventional policy approaches

forward guidance quantitative easing targeted asset purchases

3 categories of unconventional policy approaches

forward guidance quantitative easing targeted asset purchases

3 principal unconventional tools of the central bank are

forward guidance quantitative easing targeted asset purchases

the fed controls the _____ on these loans they give out, not the quantity of credit extended

interest rate

cost of borrowing for those of us who need resources and the reward for lending to those of us with savings

interest rates

these are the instruments that are not directly under their control but lie instead somewhere between their policymaking tools and their objectives

intermediate targets

the procedure that allows banks to have 16 days to figure out their deposit balances before they even need to start holding reserves

lagged-reserve accounting

when the central bank makes loans to banks when no one else will or can

lender of last resort

discount lending

lending by the federal reserve, usually to commercial banks

to stimulate economic activity, forward guidance aims at

lowering the long term interest rates that affect private spending

the reserves a bank must hold are also averaged over a 2 week period called the

maintenance period

at which transactions between banks take place

market federal funds rate

the overnight interest rate at which lending between banks takes place in the market

market federal funds rate

europeans equivalent of the feds target federal funds rate

minimum bid rate also known as target refinancing rate

the fed adjusts the supply of reserves, with the goal of keeping the market federal funds rate close to the target rate using

open market operations

refer to actual tools of policy

operating instruments

these are the instruments that the central bank controls directly

operating instruments

the european analog to the market federal funds rate

overnight cash rate

the overnight interest rate on interbank loans in Europe

overnight cash rate

designed to provide additional reserves at times when the open market staff's forecasts are off and so the day's reserve supply falls short of the banking system's demand

primary credit

extended on a very short-term basis, usually overnight, to institutions that the Fed's bank supervisors deem to be sound

primary credit

the term discount rate usually refers to

primary discount rate

the rate on primary credit loan

primary discount rate (set above the federal funds rate)

what 3 loans do the fed make

primary loan secondary loan seasonal loan

in which the central bank supplies aggregate reserves beyond the quantity needed to lower the policy rate

quantitative easing

occurs when the central bank expands the supply of aggregate reserves to the banking system beyond the level that would be needed to maintain its policy target rate

quantitative easing

collateralized loans in what are called

refinancing operations

4th tool in the monetary policy toolbox

reserve requirements

used primarily by small agricultural banks in the Midwest to help in managing the cyclical nature of farmers loans and deposits

seasonal credit

available to institutions that are not sufficiently sound to qualify for primary credit

secondary credit

provided to banks that are in trouble

secondary credit

set above the primary discount rate

secondary discount rate

contract reserves by

selling short term government securities

the interest rate on primary credit is set at a

spread above the federal funds target rate

supply of reserves adjusted through open market operations to meet expected demand at the target rate

target federal fund rate

FOMC primary policy instrument

target federal funds rate

changes interest rates throughout the economy

target federal funds rate

primary instrument of monetary policy

target federal funds rate

in which the central bank alters the mix of assets it holds on its balance sheet in order to change their relative prices in a way that stimulates economic activity

targeted asset purchases

says that the target federal funds rate should be set equal to the current level of inflation plus a 2% real interest rate plus a factor related to the deviations of inflation and output from their target or normal levels

taylor rule

simple formula that approximates what the FOMC does

taylor rule

tracks the actual behavior of the target federal funds rate and relates it to the real interest rate, inflation, and output

taylor rule

quantitative easing increases the size of

the central banks balance sheet

ECB's marginal lending facility

the facility through which the ECB provides overnight loans to banks

minimum bid rate

the minimum interest rate that banks can bid for reserves in the ECB's weekly refinancing operation

lending of last resort

the ultimate source of credit to banks during a panic and a role of the central bank

in setting the primary lending rate above the target federal funds rate, the fed is attempting

to stabilize the market interest rate on an overnight interbank lending

unpredictable and potentially disruptive

unconventional monetary policy

ECB's deposit facility

where euro-area banks with excess reserves can deposit them overnight and earn interest

the term for the fact that a nominal interest rate, including the monetary policy rate, cannot fall below zero

zero bound

banks can always hold cash paying

zero interest

the analog to the federal reserves primary credit facility

ECB's marginal lending facility

repurchase agreements

a short term collateralized loan in which a security is exchanged for cash, with the agreement that the parties will reverse the transaction on a specific future date, as soon as the next day

banks that request secondary credit from the Fed are banks that

cant borrow from anyone else

the federal funds rate target, the rate for discount window lending, and the deposit rate

conventional policy tools

the floor

deposit rate

sets a ceiling on the market federal funds rate

discount rate

communication regarding expected future policy target rates

forward guidance

target federal funds rate is determined in the

market, not the by fed

the bank is in trouble

secondary credit

the federal reserve has 4 conventional monetary policy tools

1) the target federal funds rate 2) the discount lending rate 3) the deposit rate 4)reserve requirements

there are two circumstances when additional policy tools can play a useful stabilization role

1) when lowering the target interest rate to zero is not sufficient to stimulate the economy 2)when an impaired financial system prevents conventional interest rate policy from supporting the economy

when inflation rises, the FOMC raises the target interest rate by _____ times the increase

1.5

the fed sets the primary lending rate at a spread

above the target federal funds rate

the ECB provides liquidity to the banking system primarily through

auctions called refinancing operations

the deposit rate is set at a spread

below the target federal funds rate

banks with excess reserves can deposit them at national central banks and receive interest at a spread

below the target refinancing rate

when marked the first time since the 30s that the Fed hit the zero bound on the nominal federal funds rate

between september 2007-december 2008, fed lowered its target for the federal funds rate 10 times

expand reserves by

buying short term government securities

what is necessary to ensure financial stability

central bank lending

to steady the financial system and the economy after the crisis, the fed utilized its three principle:

conventional policy tools

to steady the financial system, the Fed utilized the 3 principle:

conventional policy tools

set at a spread below the target funds rate

deposit rate

sets a floor on the market federal funds rate

deposit rate

sets a floor under the market federal funds rate

deposit rate

the rate that the fed pays on reserves held by banks at the central bank

deposit rate

the rate they pay on reserves banks hold at the central bank

deposit rate

lending by the federal reserve banks to commercial banks

discount lending

used to supply funds to banks, particularly during crises

discount lending rate

ceiling on market federal funds rate and means to provide liquidity to banks in times of crises

discount rate

rate they charge for discount loans to banks in need of funds

discount rate

set at a premium over the target federal funds rate

discount rate

the ceiling

discount rate

the fed allows the federal funds rate to fluctuate around its target in a channel or corridor defined by the

discount rate and the deposit rate

rate at which banks make overnight loans to each other

federal funds rate

primary tools for monetary policy during normal times

federal funds rate, discount rate, deposit rate

banks can hold either deposits at

federal reserve banks that earn interest or vault cash

the simplest unconventional approach is for the central bank to provide

forward guidance

this is when the central bank communicates intentions regarding the future path of monetary policy

forward guidance

when output rises above potential by 1%, the FOMC raises the target interest rate

half a percentage point

tend to restrict the growth of credit, making it harder for businesses and households to get financing and for individuals to find or keep jobs

higher interest rates

the 3 prices the central bank concentrates on are the:

interest rate at which banks borrow and lend reserves overnight interest rate at which banks can borrow reserves from the Fed interest rate that the Fed pays on reserves that banks hold at central bank

use of unconventional policy tools including:

massive purchases or risky assets and the communication of its intent to keep interest rates low for an extended period

the fed has four conventional monetary policy tools, also known as

monetary policy instruments

the federal reserve has 4 conventional monetary policy tools also known as

monetary policy instruments

banks will not led their reserves at a

negative nominal interest rate

banks will never choose to lend their reserves at a

negative nominal rate

the best tools are

observable, controllable, and tightly linked to objectives

vary the quantity of reserves through

open market operations

what are used to control the federal funds rate

open market operations

an increase in reserve demand is met by an

open market purchase

the european central banks primary objective is

price stability

overnight, post collateral

primary credit

the fed makes 3 types of loans

primary credit, secondary credit, and seasonal credit

the ceiling for the market rate on overnight interbank loans

primary lending rate

supplying aggregate reserves beyond the quantity needed to lower the policy rate to the target rate (usually zero)

quantitative easing

when the central bank supplies aggregate reserves beyond the quantity needed to lower the policy rate to zero

quantitative easing

set by the federal reserve board within a legally imposed range

reserve requirement

stabilizes the demand for reserves and not used to alter monetary policy

reserve requirement

what is not useful as an operational instrument

reserve requirement

used to stabilize the demand for reserves

reserve requirements

banks are required to hold:

reserves against certain deposits

bank is in an area where there is a lot of seasonal activity

seasonal credit

ECB allows banks to borrow from the marginal lending facility at an interest rate that is

set above the target refinancing rate

primary tools for monetary policymaking

short term interest rate

the tool to use to stabilize short term fluctuations in prices and outputs

short term interest rates

a bank is supposed to show its _____ to get a loan in a crisis

sound

the central bank is supposed to:

stabilize prices, output, the financial system, exchange rates, and interest rates

the fed forecasts the demand for reserves each day and then

supplies the amount needed to meet the demand at the target rate

the minimum bid rate on the main refinancing operations

target refinancing rate

the target interest rate controlled by the governing council

target refinancing rate

changing the mix of assets at the central bank to alter their relative prices

targeted asset purchases

when the central bank alters the mix of assets it holds on its balance sheet in order to change their relative prices in a way that stimulates economic activity

targeted asset purchases

simple equation that describes movements in the federal funds target rate

taylor rule

determines the floor for the market rate on overnight interbank loans

the deposit rate

target federal funds rate

the interest rate at which banks make overnight loans to each other

deposit rate

the interest rate that the Fed pays on reserves that banks hold in their accounts at the central bank and that puts a floor under the market federal funds rate

discount rate

the interest rate the Fed charges on the loans it makes to banks and that forms a ceiling for the market federal funds rate

reserve requirement

the level of balances a bank is required to hold either as vault cash or on deposit or at a federal reserve bank

can help a central bank exit smoothly from unconventional monetary policy

the payment of interest on reserves

by controlling the quantity of loans it makes, a central bank can control

the size of reserves, the size of the monetary base, and interest rates

can supplement conventional policy when a zero policy rate is not low enough to stabilize the economy or when an impaired financial system prevents conventional interest rate policy from working

unconventional monetary policy

policy mechanisms that are usually reserved for extraordinary episodes when conventional interest rate policy is insufficient for economic stabilization

unconventional policy tools

the nominal policy rate faces a ________ which says it will never fall below zero

zero bound


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