Stabilizing the Economy: The Role of the Fed Flashcards
(25 cards)
Federal Reserve (Fed)
The central banking system of the United States that controls monetary policy to stabilize the economy.
Money Demand
The amount of wealth individuals and businesses choose to hold in the form of money, also known as liquidity preference.
Open-Market Operations
The primary tool the Fed uses to control the money supply by buying or selling government bonds.
Federal Funds Rate (FFR)
The interest rate commercial banks charge each other for short-term (usually overnight) loans.
Liquidity Trap
A situation at the zero lower bound where people hold onto money instead of spending or investing despite low interest rates.
Quantitative Easing (QE)
An unconventional monetary policy where the central bank purchases longer-term securities to increase money supply and lower interest rates.
Forward Guidance
Communication from the Fed about future monetary policy intentions to influence market expectations.
Reserve Requirement
The minimum percentage of deposits that banks must hold as reserves rather than lend out.
Zero Lower Bound
The point at which short-term nominal interest rates are at or near zero, limiting the effectiveness of conventional monetary policy.
Discount Window
A Fed lending facility that allows banks to borrow reserves, typically at a penalty rate above the federal funds rate.
Taylor Rule
A formula that describes how a central bank should adjust interest rates based on inflation and output gaps.
Recessionary Gap
The difference between actual output and potential output when actual output is below potential.
Expansionary Gap
The difference between actual output and potential output when actual output exceeds potential.
Money Supply
The total amount of monetary assets available in an economy at a specific time.
Real Interest Rate
The nominal interest rate minus the inflation rate, which affects investment and saving decisions.
Planned Aggregate Expenditure (PAE)
The sum of consumption, planned investment, government spending, and net exports.
Asset Bubble
A speculative increase in asset prices substantially above their underlying market value.
Excess Reserves
Bank reserves that exceed the required minimum set by the central bank.
Multiplier Effect
The amplification of initial changes in spending on total output due to the circular flow of income.
Interest on Reserves
A tool where the Fed pays interest on bank reserves to influence bank lending behavior.
Greenspan Briefcase Indicator
An informal method analysts used to predict Fed policy by observing the thickness of the Fed Chairman’s briefcase.
Portfolio Allocation Decisions
How individuals distribute their wealth among various assets to balance risk and return.
Cost-Benefit Principle
The economic concept that people balance the marginal cost of holding money against its marginal benefit
Lender of Last Resort
A central bank function where it provides liquidity to financial institutions during crises to prevent systemic collapse.
