AP Econ Chapter 13

Federal Open Market Committee (FOMC)

Closely allied with the Board of Governors; meets 8 times a year in Washington. Its decisions largely determine short-term interest rates and the size of the U.S. money supply. This twelve member committee consists of the seven governors of the Federal Reserve System, the president of the Federal Reserve Bank of New York, and, on a rotating basis, four of the other eleven district bank presidents.

Why the Aggregate Demand Curve Slopes Downward

Rising prices reduce the purchasing power of certain assets and a decline in real wealth slows consumption spending. Higher domestic prices depress exports and stimulate imports. At higher price levels, the quantity of bank reserves demanded is greater. Because higher interest rates discourage investment, aggregate quantity demanded is lower when the price level is higher.

Federal Reserve Lending to Banks

The Fed provides insurance against financial panics by being a "lender of last resort." The Fed might give money to struggling banks, inducing them to lend more to customers. The Fed entices banks to borrow by having a low interest rate.

Open-Market Operations

The Fed's purchase or sale of government securities through transactions in the open market.

Federal Reserve System

The Fed; established in 1914; these are the "bank of banks." There are 12 banks in (this). Their stockholders are normal banks. (This) is governed by the seven-member Board of Governors of the (This). (This) is independent of the rest of the government and controls the nation's monetary policy.

Monetary Policy

The actions that the Federal Reserve System takes to change interest rates and the money supply. It is aimed at affecting the economy.

Central Bank Independence

The central bank's ability to make decisions without political interference.

Discount Rate

The interest rate the Fed charges on loans that it makes to banks.

Federal Funds Rate

The interest rates that banks pay and receive when they borrow reserves from one another.

Equilibrium in the Market for Bank Reserves

The position of the supply curve depends on Federal Reserve policy. The demand curve is for a given GDP and price level. The equilibrium point is the quantity of bank reserves and interest rate.

Reserve Requirements

The ratio of reserves required by the government to be held at the bank. A reduction in (this) shifts the demand curve inward (because banks no longer need as many reserves), thereby lowering interest rates. Raising (this) will raise interest rates and set off a multiple contraction of the banking system.

Bond Prices and Interest Rates

When bond prices rise, interest rates fall because the purchaser of a bond spends more money than before to earn a given number of dollars of interest per year. When bond prices fall, interest rates rise.

Central Bank

A bank for banks. The United States' (this) is the Federal Reserve System.