Chapter 13 - Monetary Policy

Fact

(FED)=central bank- a type of bank whose financial obligations underlie an economy's money supply

Commercial banks

(PNC) borrow money from the Fed.

Yield Curve

A curve that shows the relationship between interest rates and bonds time to mature

Intermediate Targets

Consumer Confidence/Stock Prices/Interest Rates Spread/Housing Starts

Fact

Contractionary policy is the policy that decreases the money supply and increases the interest rate. It decreases investment and output.

Fact

Expansionary policy is the policy that increase the money supply and decreases the interest rate. it increases investment and output.

How Monetary Policy Works in Models

Expansionary policy shifts the AD curve to the right Contractionary policy shifts the AD curve to the left

Fact

If inflation is ABOVE target, the Fed raises the Federal Funds Rate by selling thereby decrease the money supply.

Fact

If inflation is below target, and if the economy is going into a recession the Fed LOWERS the Federal Fund Rate by buying bonds thereby increasing the money supply.

Fed Tools

Open Market Operation, Discount Rate, Reserve Requirement

Inverted Yield Curve

a yield curve in which the short term rate is higher than the long term

Fed Funds

loans of excess reserves banks charge one another for Fed Funds.

The minimum is reserve requirement

the amount of reserves a bank must have.

Federal Open Market Committee

the feds chief body that decided monetary policy

Federal Funds Rate

the interest rate banks charge one another for Fed Funds.

Monetary Base

vault cash, deposits at the Fed, plus currency in circulation

The primary way the Fed changes the amount of reserves in the system is Open Market Operations

which is the Fed buying and selling treasury bills and bonds.

Fact

12 regional banks & main Federal Reserve Bank makes up the Fed.

Operating Target

Fed Funds Rate

Monetary Regime

is the predetermined statement of the policy that will be followed in various situations

Fact

Monetary Policy is controlled by the U.S. central bank which is the Fed.

The discount rate

is the rate of interest the Fed charges for loans it makes for banks.

Ultimate Targets

Stable Prices/Sustainable Growth/Acceptable Employment/Long Run Rates

Facts

To expand the money supply, the Fed buys bonds. To contract the money supply, the Fed sells bonds.

Monetary Policy

is the policy of influencing the economy through changes in banking systems reserves that influence the money supply, credit availability, and interest rates in the economy.