Definitions
Use of interest rates and the money supply to influence the level of aggregate demand and economic activity, in order to achieve the country’s macroeconomic objectives
What is Monetary Policy?
The amount of financial assets that individuals and businesses wish to hold in liquid form. it plays a crucial role in determining interest rates and influencing economic activity
What is demand for money?
The monetary policy action taken when the economy is in a recession
What is expansionary policy?
Is the amount of money in circulation within the economy at a particular point in time, as determined by the central bank. The money supply compromises legal tender, loans, credit, bank deposits, and central bank reserves
What is Money Supply?
A public institution that is responsible for implementing monetary policy, managing the currency of a country, or group of countries, and controlling the money supply
What is the Central Bank?
This type of policy is used when inflation is rising too quickly.
What is contractionary monetary policy?
The process by which commercial banks expand the money supply by lending a portion of their deposits
What is Credit Creation?
Used to calculate the present value of future cash flows, representing the time value of money and the risk of an investment. It determines how much future money is worth today
What is Discount Rate?
when the money supply shrinks, these rates rise.
What are nominal interest rates?
A ratio that measures the potential increase in the money supply for a given cash injection. This cash injection is often the result of an increase in the monetary base by a government or central bank.
What is Money Multiplier?
Debt instruments where an investor essentially loans money to the government for a predetermined period. In return for the capital, the issuer promises to pay regular interest and return the principal on a specified maturity date.
What are Bonds/ Government Securities?
When people suddenly prefer holding cash instead of financial assests, the price of these government securities fall.
What are bonds?
An economic condition where interest rates are so low (near zero) that monetary policy becomes ineffective because people prefer to hoard cash instead of investing or spending
What is a Liquidity Trap?
the fraction of deposits that regulators require a bank to hold in reserves and not loan out.
What is the Reserve requirement/minimum reserve ratio?
During the COVID-19 pandemic the federal reserve cut interest rates to nearly zero by using this type of policy.
What is expansionary monetary policy?