Economics- Chapter 16
The Federal Open Market Committee (FOMC)
makes key monetary policy decisions about interest rates and the growth of the U.S. money supply.
Limits of Monetary Policy
-Timing It can smooth out the bumps or deepen/heighten the troughs and valleys -Inside lags Time it takes to implement monetary policy Problem 1; time to identify a problem Problem 2: time to actually enact policies (more streamlined than fiscal) -Outside lags Time to be effective (longer than fiscal policy)
3 tools of Monetary Control
1) OMOs 2) Reserve Requirements 3) The discount rate
open market operations (OMOs)
Buying & selling government securities to change the supply of money To increase money supply, Fed buys govt bonds, paying with new dollars. To reduce money supply, Fed sells govt bonds, taking dollars out of circulation
prime rate
Rate of interest banks charge on short term loans to their best customers
Structure of the Fed
The Board of Governors, 12 Reserve banks, Member Banks, FOMC
federal funds rate
The interest rate at which banks make overnight loans to one another
bank holding company
a company that owns more than one bank
money multiplier formula
a formula (initial cash deposit X 1 / RRR) used to determine how much new money can be created with each demand deposit and added to the money supply
central bank
an institution that oversees the banking system and regulates the money supply
excess reserves
bank reserves greater than the amount required by the Federal Reserve
monetary policy
the actions that the Federal Reserve System takes to influence the level of real GDP and the rate of inflation in the economy.
reserve requirements
the amount of reserves that banks are required to keep on hand. To increase money supply, Fed reduces RR. To reduce money supply, Fed increaseRR, and the process works in reverse.
check clearing
the process by which banks record whose account gives up money and whose account receives money when a customer writes a check
money creation
the process by which money enters into circulation
reserves
deposits that a bank keeps readily available as opposed to lending them out
Fed functions
provides banking services to US government; banking services to banks; regulates banks; tracks and manages money supply to stabilize economy
outside lag
the time it takes for monetary policy to have an effect
inside lag
the time it takes to implement monetary policy
required reserve ratio
The minimum fraction of deposits banks are required by law to keep as reserves
Monetary v. Fiscal Policy
Monetary policy is typically implemented by a central bank, while fiscal policy decisions are set by the national government.
easy money policy
Monetary policy that increases the money supply
discount rate
interest rate the Fed charges for loans to commercial banks. To increase money supply, Fed can lower discount rate, which encourages banks to borrow more reserves from Fed. Banks can then make more loans, which increases the money supply. To decrease money supply, Fed can raise discount rate.
tight money policy
monetary policy that reduces the money supply