Chapter 12- Monetary Policy and the Federal Reserve

·      Board of Governors- the leadership of the Fed, consisting of seven governors appointed by the president to staggered 14-year terms

·      Federal Open Market Committee (FOMC)- the committee that makes decisions concerning monetary policy

·      Banking panic- a situation in which news or rumors of the imminent bankruptcy of one or more banks leads bank depositors to rush to withdraw their funds

·      Deposit insurance- a system under which the government guarantees that depositors will not lose any money even if their bank goes bankrupt

·      Federal funds rate- the interest rate that commercial banks charge each other for very short-term (usually over-night) loans; because the Fed frequently sets its policy in terms of the federal funds rate, this rate is closely watched in financial markets

·      Portfolio allocation decision- the decision about the forms in which to hold one’s wealth

·      Demand for money- the amount of wealth an individual of firm chooses to hold in the form of money

·      Money demand curve- a curve that shows the relationship between the aggregate quantity of money demanded M and the nominal interest rate i; because an increase in the nominal interest rate increases the opportunity cost of holding money, which reduces the quantity of money demanded, the money demand curve slopes down

·      Discount window lending- the lending of reserves by the Federal Reserve to commercial banks

·      Discount rate (or primary credit rate)- the interest rate that the Fed charges commercial banks to borrow reserves

·      Reserve requirement- set by the Fed, the minimum values of the ratio of bank reserves to bank deposits that commercial banks are allowed to maintain

·      Quantitative easing (QE)- an expansionary monetary policy in which a central bank buys financial assets from private financial institutions, thereby lowering the yield or return of those assets while increasing the money supply