All flashcards
Flashcard 1: What is the difference between M1 and M2 money supply?
Answer: M1 includes cash and checkable deposits; M2 includes M1 plus savings deposits. M2 is broader, including less liquid forms of money than M1.
Flashcard 2: What tool is used to measure the money supply?
Answer: Monetary aggregates like M1 and M2. These statistical measures track different components of money in circulation.
Flashcard 3: What does 'lender of last resort' mean?
Answer: Central bank provides funds to financial institutions in crisis. Prevents financial system collapse by providing emergency liquidity when needed.
Flashcard 4: What is meant by 'crowding out' in the context of fiscal policy?
Answer: Government borrowing reduces private investment. Higher government spending raises interest rates, discouraging private investment.
Flashcard 5: What is the relationship between interest rates and bond prices?
Answer: They are inversely related. Rising rates decrease bond values; falling rates increase bond values.
Flashcard 6: What is the dual mandate of the Federal Reserve?
Answer: To promote maximum employment and stable prices. Balances the goals of full employment with price stability simultaneously.
Flashcard 7: What is the concept of 'forward guidance'?
Answer: Communicating future monetary policy intentions to influence expectations. Shapes market expectations about future policy without immediate rate changes.
Flashcard 8: How does inflation targeting work?
Answer: Central bank sets an explicit inflation rate as policy goal. Provides transparency and accountability by committing to specific inflation levels.
Flashcard 9: What is a central bank's balance sheet composed of?
Answer: Assets and liabilities including securities and currency in circulation. Reflects the central bank's monetary policy operations and financial position.
Flashcard 10: What is the role of the Federal Open Market Committee (FOMC)?
Answer: To oversee open market operations and monetary policy. The key Fed committee that meets regularly to set interest rate policy.
Flashcard 11: What is the equation for the quantity theory of money?
Answer: MV=PY, where M is money supply, V is velocity, P is price level, and Y is output. Demonstrates how money supply and velocity determine price level and output.
Flashcard 12: What is the Fisher Effect?
Answer: The relationship between nominal interest rates, real interest rates, and inflation. Shows how expected inflation affects the gap between nominal and real rates.
Flashcard 13: What does a liquidity trap refer to?
Answer: When interest rates are low and savings rates are high, limiting monetary policy effectiveness. Occurs when monetary policy becomes ineffective near zero interest rates.
Flashcard 14: What is the Taylor Rule used for?
Answer: Guiding central banks in setting interest rates. Provides a formula for optimal interest rate based on economic conditions.
Flashcard 15: What is meant by 'monetary neutrality'?
Answer: Money supply changes do not affect real variables in the long run. Only affects nominal variables like prices, not real output or employment.
Flashcard 16: What is the purpose of expansionary monetary policy?
Answer: To stimulate economic growth and reduce unemployment. Lowers interest rates to boost economic activity during recessions.
Flashcard 17: What is the purpose of contractionary monetary policy?
Answer: To reduce inflation and cool an overheating economy. Raises interest rates to slow down an overheated economy.
Flashcard 18: Define reserve requirements.
Answer: Minimum reserves banks must hold, set by the Fed. This regulatory tool controls how much banks can lend relative to deposits.
Flashcard 19: What is open market operations?
Answer: Buying and selling government securities. The Fed's primary tool for implementing monetary policy through bond transactions.
Flashcard 20: What is the primary objective of monetary policy?
Answer: To control inflation and ensure economic stability. Central banks use this dual mandate to maintain price stability and full employment.
Flashcard 21: Which institution is primarily responsible for monetary policy in the U.S.?
Answer: The Federal Reserve System. The Fed is the central bank that implements U.S. monetary policy decisions.
Flashcard 22: Identify the term for the rate at which banks can borrow reserves from each other overnight.
Answer: Federal funds rate. This interbank lending rate influences broader economic interest rates.
Flashcard 23: What is a central bank's role in stabilizing the financial system?
Answer: Ensures liquidity and acts as a lender of last resort. Maintains financial stability by preventing bank runs and systemic crises.
Flashcard 24: What is a 'repo' in monetary policy terms?
Answer: Repurchase agreement, a short-term loan for dealers in government securities. A key tool for injecting liquidity into the financial system temporarily.
Flashcard 25: Which institution is primarily responsible for monetary policy in the U.S.?
Answer: The Federal Reserve System. The Fed is the central bank that implements U.S. monetary policy decisions.
Flashcard 26: What is the purpose of contractionary monetary policy?
Answer: To reduce inflation and cool an overheating economy. Raises interest rates to slow down an overheated economy.
Flashcard 27: What is the purpose of expansionary monetary policy?
Answer: To stimulate economic growth and reduce unemployment. Lowers interest rates to boost economic activity during recessions.
Flashcard 28: What is meant by 'monetary neutrality'?
Answer: Money supply changes do not affect real variables in the long run. Only affects nominal variables like prices, not real output or employment.
Flashcard 29: What does a liquidity trap refer to?
Answer: When interest rates are low and savings rates are high, limiting monetary policy effectiveness. Occurs when monetary policy becomes ineffective near zero interest rates.
Flashcard 30: What is the Fisher Effect?
Answer: The relationship between nominal interest rates, real interest rates, and inflation. Shows how expected inflation affects the gap between nominal and real rates.