AP Economics Chapter 33 Vocabulary:

Monetary Policy: A central bank’s changing of the money supply to influence interest rates and assist the economy in achieving price stability, full employment, and economic growth.

Interest: The payment made for the use of money.

Transactions Demand: The amount of money people want to hold for use as a medium of exchange (to make payments); varies directly with nominal GDP.

Asset Demand: The amount of money people want to hold as a store of value; this amount varies inversely with the interest rate.

Total Demand for Money: The sum of the transactions demand for money and the asset demand for money.

Open-market Operations: The buying and selling of U.S. government securities by the Federal Reserve Banks for purposes of carrying out monetary policy.

Reserve Ratio: The fraction of checkable deposits that a bank must hold as reserves in a Federal Reserve Bank or in its own bank vault; also called the reserve requirement.

Discount Rate: The interest rate that the Federal Reserve Banks charge on the loans they make to commercial banks and thrift institutions.

Term Auction Facility: The monetary policy procedure used by the Federal Reserve, in which commercial banks anonymously bid to obtain loans being made available by the Fed as a way to expand reserves in the banking system.

Federal Funds Rate: The interest rate banks and other depository institutions charge one another on overnight loans made out of their excess reserves.

Expansionary Monetary Policy: Federal Reserve system actions to increase the money supply, lower interest rates, and expand real GDP; an easy money policy.

Prime Interest Rate: The benchmark interest rate that banks use as a reference point for a wide range of loans to businesses and individuals.

Restrictive Monetary Policy: Federal Reserve system actions to reduce the money supply, increase interest rates, and reduce inflation; a tight money supply.

Taylor Rule: A modern monetary rule proposed by economist John Taylor that would stipulate exactly how much the Federal Reserve should change real interest rates in response to divergences of real GDP from potential GDP and divergences of actual rates of inflation from a target rate of inflation.

Cyclical Asymmetry: The idea that monetary policy may be more successful in slowing expansions and controlling inflation than in extracting the economy from severe recession.

Mortgage Debt Crisis: The period beginning in late 2007 when thousands of homeowners defaulted on mortgage loans when they experienced a combination of higher mortgage interest rates and falling home prices.