Key Terms

Key Terms

bank run
when depositors race to the bank to withdraw their deposits for fear that otherwise they would be lost
basic quantity equation of money
money supply × velocity = nominal GDP
central bank
institution that conducts a nation’s monetary policy and regulates its banking system
contractionary monetary policy
a monetary policy that reduces the supply of money and loans
moving in the opposite direction of the business cycle of economic downturns and upswings
deposit insurance
an insurance system that makes sure depositors in a bank do not lose their money, even if the bank goes bankrupt
discount rate
the interest rate charged by the central bank on the loans that it gives to other commercial banks
excess reserves
reserves banks hold that exceed the legally mandated limit
expansionary monetary policy
a monetary policy that increases the supply of money and the quantity of loans
federal funds rate
the interest rate at which one bank lends funds to another bank overnight
inflation targeting
a rule that the central bank is required to focus only on keeping inflation low
lender of last resort
an institution that provides short-term emergency loans in conditions of financial crisis
loose monetary policy
see expansionary monetary policy
open market operations
the central bank selling or buying Treasury bonds to influence the quantity of money and the level of interest rates
quantitative easing (QE)
the purchase of long-term government and private mortgage–backed securities by central banks to make credit available in hopes of stimulating aggregate demand
reserve requirement
the percentage amount of its total deposits that a bank is legally obligated to to either hold as cash in their vault or deposit with the central bank
tight monetary policy
see contractionary monetary policy
the speed with which money circulates through the economy; calculated as the nominal GDP divided by the money supply