Monetary Policy Concepts

Contractionary Monetary Policy

• Actions that increase the money supply, lower interest rates, and increase spending.

• Actions that decrease the money supply, raise interest rates, and decrease spending.

• Actions that maintain the current money supply and interest rates.

• Actions that decrease the money supply, lower interest rates, and increase spending.

Administered Rates

• Interest rates set directly by the central bank, such as the discount rate and interest on reserves.

• Market-driven interest rates determined by supply and demand.

• Interest rates that fluctuate based on inflation rates.

• Interest rates set by commercial banks based on their lending policies.

Expansionary Monetary Policy

• Actions that decrease the money supply and increase interest rates.

• Actions that increase the money supply, lower interest rates, and increase spending.

• Actions that maintain the current money supply and interest rates.

• Actions that restrict spending and increase savings.

Discount Rate

• The interest rate the central bank charges commercial banks for loans.

• The rate at which banks lend to each other overnight.

• The interest rate on savings accounts offered by banks.

• The rate at which the government borrows money from the public.

Open Market Operations (OMO)

• The buying and selling of government bonds by the central bank.

• The regulation of interest rates by the government.

• The process of printing more currency by the central bank.

• The management of foreign exchange reserves.

Reserve Requirement

• The percentage of deposits that banks must hold as reserves.

• The total amount of money a bank can lend out.

• The interest rate banks charge for loans.

• The minimum balance required to open a bank account.

Reserve Market

• A model showing the supply and demand for bank reserves used to determine the policy rate.

• A marketplace for trading government bonds.

• A system for managing foreign exchange reserves.

• A platform for buying and selling commodities.

Federal Funds Rate

• The interest rate banks charge each other for overnight loans of reserves.

• The rate at which the government borrows money from the public.

• The interest rate set by the central bank for long-term loans.

• The rate banks charge customers for personal loans.

Federal Reserve (the Fed)

• The central bank of the United States, responsible for conducting monetary policy.

• A private bank that issues currency in the U.S.

• A government agency that regulates stock markets.

• An international organization that manages global trade.

Limited Reserves

• A system where banks hold large amounts of reserves, leading to stable interest rates.

• A system where banks hold relatively small amounts of reserves, so changes in the money supply strongly affect interest rates.

• A system where banks are required to keep all deposits as reserves, eliminating the risk of bank runs.

• A system where banks can lend out all their deposits without holding any reserves.