Concepts Definitions

• Federal Reserve (the Fed): The central banking system of the United States, which regulates commercial banks and implements monetary policy to stabilize the national economy.

• Monetary Policy: The actions of a central bank (like the Federal Reserve) that directly impact the rate of growth of the money supply, primarily through modifying short-term interest rates, buying and selling government bonds, and changing reserve requirements for banks.

• Tight Money Market: An economic condition where the demand for money is greater than its supply, leading to higher interest rates and stricter lending standards. The Fed would aim to ease this with expansionary policies.

• Discount Rate: The interest rate that Federal Reserve Banks charge commercial banks in their districts for short-term loans. Lowering this rate is expansionary.

• Reserve Requirements: The amounts of cash or credit deposits that banks must set aside and hold in their vaults or at a Reserve Bank, as determined by the Federal Reserve. A reduction in these requirements increases the funds available for lending.

• Open Market Operations: The most frequently used tool by the Federal Reserve to stimulate the economy, involving the buying and selling of government securities or bonds to expand or contract the money supply. Purchasing securities injects money into the system, while selling securities decreases it.

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