Chapter 16

interest rate

Percentage of amount borrowed to be added to the amount loaned and paid back

What is the federal reserve system primary monetary policy making body, and what does that body do?

The Federal Open Market Committee, or FOMC, is the Fed's monetary policymaking body. It is responsible for formulation of a policy designed to promote stable prices and economic growth. Simply put, the FOMC manages the nation's money supply. ... All Reserve Bank presidents participate in FOMC policy discussions.

member bank

bank that belongs to the Federal Reserve System

reserve requirement

the percentage of deposits that banking institutions must hold in reserve

quantitative easing

when the Fed buys longer-term government bonds or other securities

In what ways are member banks part of the federal reserve system?

A member bank is a commercial bank that's part of the Federal Reserve System. These banks maintain reserve deposits in the Federal Reserve Bank in their districts. National banks must be members; state-chartered banks may join by meeting certain requirements.

Council of Economic Advisors

A three-member body appointed by the president to advise the president on economic policy.

What was the passive fiscal policy that helped stabilize the economy during the great recession?

Expansionary fiscal policy is most appropriate when an economy is in recessionand producing below its potential GDP. Contractionary fiscal policy decreases the level of aggregate demand, either through cuts in government spending or increases intaxes.

What is the effect of a fractional reserve system?

Fractional reserve banking is a system in which only a fraction of bank deposits are backed by actual cash on hand and available for withdrawal. This is done to theoretically expand the economy by freeing capital for lending.

monetary policy

Government policy that attempts to manage the economy by controlling the money supply and thus interest rates.

What is the economic philosophy that places primary importance on the role of the money in the economy? explain what solution this philosophy offers to promote price stability, full employment, and economic growth.

Monetarism is a philosophy in the economy that gives the greatest significance to the role of money. It finds the best solutions for economic growth in minimum fluctuations in the money supply as the best prevention for rising inflation and unemployment.

What two policies were used by the fed in the great recession? explain what the fed does in implementing these two policies.

Monetary Policy Objectives. By law, the Fed implements monetary policy for the U.S. in order to achieve two ongoing objectives: reducing unemployment and controlling inflation. Its primary tool for accomplishing this is setting a short-term interest rate—the federal funds rate.

prime rate

Rate of interest banks charge on short-term loans to their best customers

currency

a system of money in general use in a particular country.

quantity theory of money

a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate

bank holding companies

company that owns and controls one or more banks

legal reserves

currency and deposits used to meet the reserve requirement

passive fiscal policies

fiscal actions that do not require new actions to go into effect

coins

metallic forms of money such as pennies, nickels, dimes, and quarters

easy money policy

monetary policy that increases the money supply

tight money policy

monetary policy that makes credit expensive and in short supply in an effort to slow the economy

Baby Boomers

people born between 1946 and 1964

wage and price controls

policies and regulations making it illegal for firms to give raises or raise prices without government permission

excess reserves

reserves greater than the required amounts

member bank reserve

reserves kept by member banks at the Fed to satisfy reserve requirements

fractional reserve system

system requiring financial institutions to set aside a fraction of their deposits in the form of reserves

Monetarism

the belief that inflation occurs when too much money is chasing too few goods

open market operations

the buying and selling of government securities to alter the supply of money

discount rate

the minimum interest rate set by the Federal Reserve for lending to other banks.