Term
| FED's 3 tools of monetary policy |
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Definition
1. Discount Lending
2. Open Market Operations
3. Reserve Requirements |
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Term
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Definition
-Fed's primary tool for ensuring short-term financial stability, eliminating bank panics, and preventing the sudden collapse of institutions that are experiencing financial difficulties.
-Makes 3 types of loans:
Primary Credit, Secondary Credit, and Seasonal Credit |
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Term
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Definition
-Extended on a very short-term basis, usually overnight, to institutions that the Fed's bank supervisors deem to be sound.
-Designed to provide liquidity in times of crisis, ensuring financial stability, and keep reserve shortages from causing spikes in the market FFR.
-Helps maintain interest-rate stability |
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Term
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Definition
-Available to institutions that are not sufficiently sound to qualify for primary.
-2 reasons a bank will seek sec. credit
1. A temporary shortfall in reserves
2. Can't borrow from anyone else |
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Term
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Definition
-Used primarily by small agricultural banks in the Midwest to help in managing the cyclical nature of farmers' loans and deposits.
-Banks that had poor access to national money markets, FED stepped in to provide credit, charging a market-based interest rate.
*Been a move to eliminate, banks now have easy access to longer-term loans from commercial banks. |
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Term
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Definition
-The target federal funds rate is the primary policy instrument.
-The FED adjusts the supply of reserves to maintain the target rate close to market rate.
-The FED buys or sells bonds to add or drain reserves as required to meet the expected demand for reserves at the target rate. |
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Term
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Definition
-only portion of each deposit is held by banks as reserves
-Almost never changed:
-Calculating reserve requirement is difficult
-Easier for FOMC to forecast reserve demand
-Small % change in the reserve ratio causes very large changes in bank reserve balances. |
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Term
| Deposit-expansion multiplier |
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Definition
-the increase in commercial bank deposits following a one-dollar open market purchase
-change in deposits= 1/rr x change in reserves
-multiplier = 1/.10 = 10. |
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Term
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Definition
-Short-term collateral loan which a security is exchanged for cash, both parties agree to reverse transaction on specific date, as soon as the next day.
-The FED buys a security in exchange for reserves, and seller agrees to repurchase, FED engages in mainly in short-term repo, usually 1 business day. |
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Term
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Definition
- Set FED funds target = 2.5 + current inflation + 1/2(inflation gap) + 1/2(output gap)
- If inflation gap > 0, FFR ^
-^rates--spending slows--prices fall
- If output gap > 0, FFR ^ |
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