Monetary Policy and The Role of Central Banks

The buying and selling of securities by the central bank.

How a change in monetary policy affects the price level and inflation.

Through the banking system via loans and deposits.

Ineffective tools, misjudgment of economic conditions, or external shocks.

They tend to increase with GDP growth in the economy.

To facilitate repurchase agreements where banks agree to repurchase the securities at a higher price in the future.

The rate at which the central bank is lending to member banks.

It makes long-term bonds more attractive and reduces long-term interest rates.

Monetary policy can be used to control inflation by adjusting interest rates.

To serve as a medium of exchange for goods and services.

The interaction between the supply of money and the demand to hold it.

1 divided by the reserve requirement.

There would be an excess supply of money.

Effects on other short-term rates, asset values, currency exchange rates, and expectations.

Open market operations.

A form of monetary policy where a central bank purchases securities to lower interest rates and increase the money supply.

It may increase the probability of a recession.

Individuals hold the money in cash balances instead of investing in interest-bearing securities.

The funds available for lending decrease, leading to a lower money supply and higher interest rates.

It increases foreign demand for domestic goods.

Increased inflation, employment, and real GDP.

It can be easily stored and maintains most of its value over time.

The nominal interest rate that could be earned by lending it to others.

It increases the money supply.

They decreased their lending.

To manage the economy by controlling the money supply and interest rates.

It continues until there is no more money left to be deposited and loaned out.

Long-term rates could fall, potentially increasing economic growth.

The rate that banks charge each other on overnight loans of reserves.

A policy aimed at increasing the money supply to stimulate economic growth.

Includes M2, plus repurchase agreements, MMF units, and debt securities with up to two years maturity.

The interbank lending rate decreases as banks are more willing to lend reserves to each other.

To be free from political interference and effectively achieve its goals.

Periodically reporting views on economic indicators and factors influencing rate-setting policy.

It reduces cash in investor accounts, decreases excess reserves and funds available for lending, and tends to increase interest rates.

10 (1/0.1).

They seek to buy bonds.

They may increase even as short-term rates fall.

They borrow more and increase their money holdings.

Liquidity trap conditions.

The monetary policy is contractionary.

Asset prices in general will decrease.

The equilibrium rate of interest where there are no excess money balances.

$1,000 (100 * 10).

Fractional reserve banking.

It represents a liability to the bank because it is effectively loaned to the bank by the customer.

Interest rates (the price of money) go up to I0.

Due to the effect of monetary policy changes on expected inflation.

Gold and foreign exchange reserves.

Higher net exports, consumer spending, and business investments.

By using tools such as open market operations, discount rates, and reserve requirements.

Around 2% to 3%.

Transactions money balances.

It retains value over time, allowing individuals to save and defer consumption.

Reserve requirements.

It drags the price of money down to I0.

Because their expectations for future economic growth decrease.

By adjusting the money supply through various monetary policy tools.

Comprises notes and coins in circulation, demand deposits at commercial banks.

Funds available for lending surge, increasing the money supply and decreasing interest rates.

The central bank buys securities, increasing bank reserves.

It causes the currency to depreciate in the foreign exchange market.

To stimulate economic growth by increasing the money supply and lowering interest rates.

Cash replaces securities in investor accounts, increasing excess reserves and the money supply, while decreasing interest rates.

Money can be used to quantify the value of goods and services.

Policy rate.

I appreciate the assistance provided.

The policy rates.

There would be an excess demand for money.

Reserves of $10 and a loan of$90.

A situation where individuals hold more money even without a decrease in short-term rates.

Comprises notes and coins in circulation, plus all overnight deposits.

To monitor and regulate the banking system to prevent financial crises.

A policy aimed at decreasing the money supply to control inflation.

To act as a lender of last resort to stabilize the financial system.

Following through on their stated intentions.

Contractionary monetary policy implemented through an increase in the policy rate.

Aggregate demand will decrease as consumers reduce credit purchases and businesses cut back on investments.

Bank A retains $10 as reserves and loans out$90.

It can lead to an appreciation of the domestic currency relative to foreign currencies.

The central bank has limited ability to further stimulate the economy.

It does not always produce the intended results.

Includes M1, plus deposits redeemable with notice up to three months and deposits with maturity up to two years.

Anything that is generally accepted as a medium of exchange.

To implement monetary policy by the central bank.

Four channels.

Fiat money.

They will expect lower future inflation rates.

Standards of risk-taking and reserve requirements.

The growth rate of the money supply that neither increases nor decreases the economic growth rate.

The monetary policy is expansionary.

To manage a country's currency, money supply, and interest rates.

Stability in exchange rates, full employment, and sustainable positive economic growth.

Open market operations, interest rate adjustments, and reserve requirements.

Monies held in anticipation that other assets will decline in value.

The amount of wealth that citizens choose to hold in the form of money as opposed to bonds or equities.

Balances held to provide a buffer against unforeseen events that might require money.

The government and other banks.

The smaller the reserve requirement, the greater the money multiplier effect.

The seller deposits the $90 in Bank B.

Higher expected future asset prices make long-term bonds less attractive, increasing long-term interest rates.

It results in a small effect on long-term rates if investors believe the inflation target will be maintained.

To control or influence the quantity of money supplied in an economy.

Medium of exchange, unit of account, and store of value.

Currency, store of value, medium of exchange, and unit of account.

It provides a standard measure of value for goods and services.

The collapse of the credit bubble.

To supply money.

Quantitative easing (QE).

Central Banks.

Narrow money along with the entire range of liquid assets that can be used to make purchases.

Open market operations.

Bond market participants who react to changes in monetary policy and inflation expectations.

Includes M1, plus savings and money market deposits, time deposit accounts of less than $100,000.

Central banks adjust interest rates to influence borrowing, spending, and inflation.

To control inflation and promote price stability.

It measures the value of all goods and services.

Banks may not be willing to lend.

10% of any money deposited.

It may attract foreign investment in debt securities.

Expansionary monetary policy.

Encompasses the notes and coins in circulation in an economy, plus other very highly liquid deposits.

It decreases lending and increases interest rates.

The payments system.

It retains $9 in reserve and loans out$81.

Their ability to print money.

Banks must be willing to lend and customers must be willing to borrow.

By conducting monetary policy.

They will increase in line with the increase in the policy rate.

Sales of securities tend to cause interest rates to increase.

It could lead to an increase in expected inflation rates.

It reduces banks’ cost of funds, encourages lending, and tends to decrease overall interest rates.

They are tamed or lowered.

The rate at which banks can borrow reserves from the Fed during temporary shortfalls.

Lender of last resort.

A decrease in the growth rate of the money supply.

It increases business investment in plant and equipment.

Central banks implement monetary policy to influence economic activity and maintain price stability.

An increase in the growth rate of the money supply.

To manage the economy by controlling the money supply and interest rates.