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What does the Central Bank do
- acts as a banker to the central government
- acts as a banker to banks
- acts as a regulator of banks
- conducts monetary policy
- supports the stability of the financial system
list some characteristics of the central bank/fed
it is as independent from the government as possible
made up of 12 regional banks
regional banks owned by commercial banks in their districts that have chosen to be members of the fed
The members have 14 year terms to avoid conflict with the presidency
Define Discount Rate
Interest rate charged by the Fed when it lends reserves to banks
Define Federal Funds Market
a market in which banks lend reserves to one another
Define Federal Funds Rate
the interest rate charged when one bank lends reserves to another.
A promise made by the issuer of the bond to pay the owner of the bond a payment on a specific date
Define Open-Market Operations
the buying and selling of federal government bonds by the Fed
Define Employment Act of 1946
the first official statement of goals for macroeconomic performance in the U.S.
What does the expansionary policy do?
- pushes bond prices up
- interest rates down, exchange rate down
- increases investment
- increases aggregate demand
What does the contractionary policy do?
- Pushes bond prices down
- interest rates up, exchange rate up
- decrease investment
- decrease aggregate demand
what policy goes with a recessionary gap and an inflationary gap?
- recessionary gap = expansionary policy
- inflationary gap = contractionary policy
Define Recognition Lag
the delay between the time a macroeconomic problem arises and the time at which policy makers become aware of it
Define Implementation Lag
the delay between the time at which a problem is recognized and the time at which a policy to deal with it is enacted
Define Impact Lag
the delay between the time a policy is enacted and the time that policy has its impact on the economy
Define Liquidity Trap
Situation that exists when a change in monetary policy gas no effect on interest rates.
Define Credit Easing
policy in which a bank convinces the public that it will keep interest rates very low by providing reserves for as long as is necessary to avoid deflation
how long are the lags in fiscal/monetary policy?
fiscal policy = long implementation, short impact
monetary policy = short implementation, long impact
If the Fed purchases federal government bonds on the open market, bank reserves will _________, leading to an __________ in the money supply and __________ the fed funds rate
increase, increase, decrease
Define Gresham's Law
tendency for low-quality money to drive high-quality money out of circulation
The Federal Reserve System was established in 1913 in response to what?
Bank Panic of 1907
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