Monetary Policy

Vocabulary

contractionary monetary policy

intervention in an economy through central bank actions with the goal of decreasing economic growth

discount rate

the interest rate on loans the Federal Reserve makes directly to banks to meet temporary shortages of reserves

expansionary monetary policy

intervention in an economy through central bank actions with the goal of increasing economic growth

federal funds rate

rate charged for loans of excess reserves between banks to meet reserve requirements

Federal Reserve

the central bank and lender of last resort in the United States

fiscal policy

government intervention in the economy through spending and tax policies

hyperinflation

extreme inflation in which prices spiral out of control as supply cannot keep up with demand

impact lag

delay between the implementation of a policy and the effects of that policy

implementation lag

delay between the recognition of a problem and the implementation of policy

liquidity trap

at very low interest rates, the result that monetary policy becomes ineffective because increases in the money supply have no effect on interest rates

monetary policy

intervention in an economy through central bank actions, such as adjustments to interest rates, reserve requirements, and open-market operations

money growth rate

rate at which the amount of money in an economy grows

mortgage-backed security

a financial asset backed by mortgages that can be traded

open-market operation

process through which the Federal Reserve buys Treasury bills to expand the money supply or sells Treasury bills to contract the money supply

quantitative easing

situation in which a central bank uses money it creates electronically to purchase long-term securities in order to introduce more money into the economy

recognition lag

delay between the emergence and recognition of a problem

theory of liquidity preference

theory that suggests that interest rates are determined by the supply and demand of money

Treasury bill

a security issued by the U.S. Treasury Department representing a short-term debt obligation, with a relatively low interest rate and a maturity period of less than a year