U.S. Monetary Policy: Tools, Transmission, and Trade-Offs Free Online FlashCards

What is monetary policy?

Monetary policy is a central bank’s use of interest rates, reserve balances, asset purchases, and communication to influence economic activity, employment, inflation, and financial conditions.

What are the Federal Reserve’s statutory monetary-policy goals?

The FOMC conducts U.S. monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates.

What is the federal funds rate?

Federal funds are reserve balances held at Federal Reserve Banks; the federal funds rate is the interest rate on usually overnight loans of those balances between depository institutions.

How does the IORB rate operate in an ample-reserves system?

In an ample-reserves system, the IORB rate helps establish a floor beneath short-term market rates and supports the FOMC’s target range for the federal funds rate.

What happens after the Fed purchases securities?

An open market purchase adds reserve balances to the banking system, generally lowers short-term interest rates, and encourages borrowing and spending. It is expansionary monetary policy.

How do reserve requirements affect lending in the traditional model?

In the traditional textbook model, lowering the reserve requirement increases funds available for lending, while raising it decreases those funds. U.S. transaction-account ratios have been 0 percent since March 26, 2020.

What is the usual short-run effect of expansionary monetary policy?

Expansionary policy lowers interest rates or eases financial conditions, increasing borrowing and spending. Aggregate demand rises, usually raising real GDP and reducing cyclical unemployment in the short run.

What does the credit channel describe?

The credit channel changes the availability of loans as well as their price. Easier conditions may encourage banks to lend, while higher risk or rates may cause banks to tighten standards.

How does forward guidance transmit monetary policy?

Forward guidance influences economic decisions by communicating likely future policy. Expectations of persistently low rates can encourage current long-term investment and purchases.

How should monetary policy respond to recessionary pressure?

For a recession with rising unemployment, the FOMC can lower its target range, adjust IORB, and reduce borrowing costs. Consumption and investment rise, shifting aggregate demand right.

Why is a negative supply shock difficult for monetary policy?

A negative supply shock can raise inflation while reducing output and employment. Tightening may lower inflation but worsen production and jobs; easing may support output but prolong inflationary pressure.

What is the effective lower bound?

At the effective lower bound, rates cannot generally be reduced much further, so additional cuts may provide little stimulus. The central bank may use forward guidance, longer-term security purchases, or liquidity facilities.