Economics Chapter 11

The Federal Reserve Act

"An Act to provide for the establishment of Federal reserve banks, to furnish an elastic currency, [to make loans to banks], to establish a more effective supervision of banking in the United States, and for other purposes."

The Full Employment and Balanced Growth Act of 1978

generally known as the Humphrey-Hawkins Act, specified that by 1983 the federal government should achieve an unemployment rate among adults of 3% or less, a civilian unemployment rate of 4% or less, and an inflation rate of 3% or less.

The Fed's Primary Goal

keep inflation under control

Equation of Exchange

shows that the money supply M times its velocity V equals nominal GDP

Rational Expectation Hypothesis

states that people use all available information to make forecasts about future economic activity and the price level, and they adjust their behavior to these forecasts.

Expansionary Monetary Policy

the Fed will buy bonds, thereby increasing the money supply. Effects AD-AS, Bond market, Money market, Foreign Exchange market

Impact Lag

the delay between the time a policy is enacted and the time that policy has its impact on the economy.

Velocity

the number of times the money supply is spent to obtain the goods and services that make up GDP during a particular time period.

Liquidity Trap

said to exist when a change in monetary policy has no effect on interest rates

the Fed has three tools at its command to try to change aggregate demand

It can buy or sell federal government bonds through open-market operations, it can change the discount rate, or it can change reserve requirements.

Contractionary Monetary Policy

The Fed will generally pursue a contractionary monetary policy when it considers inflation a threat.

Recognition Lag

The delay between the time a macroeconomic problem arises and the time at which policy makers become aware of it

Implementation Lag

The delay between the time at which a problem is recognized and the time at which a policy to deal with it is enacted

Credit Easing

a strategy that involves the extension of central bank lending to influence more broadly the proper functioning of credit markets and to improve liquidity

Quantitative Easing

convince the public that it will keep interest rates very low by providing substantial reserves for as long as is necessary to avoid deflation

The Employment Act of 1946

declared that the federal government should "use all practical means . . . to promote maximum employment, production and purchasing power." The act also created the Council of Economic Advisers (CEA) to advise the president on economic matters