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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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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