Chapter 28 Monetary Policy & Bank Regulation

central bank

institution which conducts a nation's monetary policy and regulates its banking system

open market operations

the central bank selling or buying Treasury bonds to influence the quantity of money and the level of interest rates

What is deposit insurance?

An insurance system that makes sure depositors in a bank do not lose their money, even if the bank go bankrupt.

What is the Federal Reserve?

It is the central banking system of the United States,

expansionary monetary policy

a monetary policy that increases the supply of money and the quantity of loans

contractionary monetary policy

a monetary policy that reduces the supply of money and loans

inflation targeting

a rule that the central bank is required to focus only on keeping inflation low

lender of last resort

an institution that provides short-term emergency loans in conditions of financial crisis

deposit insurance

an insurance system that makes sure depositors in a bank do not lose their money, even if the bank goes bankrupt

quantitative easing (QE)

the purchase of long-term government and private mortgage-backed securities by central banks to make credit available in hopes of stimulating aggregate demand

velocity

the speed with which money circulates through the economy; calculated as the nominal GDP divided by the money supply

basic quantity equation of money

money supply × velocity = nominal GDP

countercyclical

moving in the opposite direction of the business cycle of economic downturns and upswings

Who runs the Fed?

A mixture of government employees and representation from private sector banks. It is run by a board of directors consisting of seven members appointed by the president and confirmed by the senate.

What is banking regulation?

A type of regulation placed on banks to create market transparency between banking institutions

What are open market operations?

Open market operations take place when the central bank sells or buys U.S. Treasury bonds in order to influence the quantity of bank reserves at the level of interest rates.

What does it do?

Using interest rate changes, the Fed helps maintain high U.S. employment and stable consumer prices.

Excess reserves

reserves banks hold that exceed the legally mandated limit

tight monetary policy

see contractionary monetary policy

loose monetary policy

see expansionary monetary policy

federal funds rate

the interest rate at which one bank lends funds to another bank overnight

discount rate

the interest rate charged by the central bank on the loans that it gives to other commercial banks

reserve requirement

the percentage amount of its total deposits that a bank is legally obligated to either hold as cash in their vault or deposit with the central bank

bank run

when depositors race to the bank to withdraw their deposits for fear that otherwise they would be lost