naked economics || ch. 10 – the federal reserve – Flashcards
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federal reserve
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has tools with more direct impact on the global economy than any other institution in the world, public or private; controls the money supply; can use monetary policy to counteract economic downturns; injects money into the financial system after sudden shocks (when consumers and firms might otherwise freeze in place and stop spending)
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interest rates
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*scenario - increase interest rates: cost of borrowed funds goes up, spending slows
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monetary policy
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economic equivalent of brain surgery; the Fed must feed just the right amount of credit to the economy to keep it growing steadily
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inflation
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a rental rate for capital, the "price of money"
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federal open market committee (FOMC)
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monetary decision (the determination whether interest rates need to go up, down, or stay the same) are made by a committee; wants to stimulate the economy by lowering the cost of borrowing - has two primary "tools": discount rate and federal funds rate
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discount rate
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the interest rate at which commercial banks can borrow funds directly from the Federal Reserve
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federal funds rate
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the rate that banks charge other banks for short-term loans; the FOMC sets a target and then manipulates the money supply to accomplish its objective; one can think of the money supply as a furnace with the federal funds rate as its thermostat
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bonds
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a safe place to park funds that aren't needed for something else
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open market operations
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Fed will continue to buy bonds with new money until the target federal funds rate has been reached
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fiscal policy
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the Fed is trying to use monetary policy to hit a particular economic target, Congress may be doing things with fiscal policy- government decisions on taxes and spending- that have a different effect entirely
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lag time
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the Fed must facilitate a rate of economic growth that is neither fast nor too slow; both the accelerator and the brake operate with a lag, meaning that neither works immediately when we press on it (instead, we have to wait a while for a response)
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wealth
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consists of all things that have value- houses, cars, commodities, human capital
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money
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a tiny subset of that wealthy is merely a medium of exchange, something that facilitates trade and commerce
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salary
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comes from the wages paid to Roman soldiers, who were paid in sacks of "sal"- salt; any medium of exchanges (gold coin, whale tooth, American dollar) serves the same basic purpose
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gold/silver standard
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paper currency derived its value from that fact that it could be redeemed for a set quantity of gold or silver, either from a bank or from the government
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inflation || impact of inflation
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the average prices are rising; the most instructive way to think about inflation is not that prices are going up, but rather that the purchasing power of the dollar is going down; retirees living on fixed incomes- if that income is not indexed for inflation, then its purchasing power will gradually fade away
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inflation || debt and inflation
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governments often owe large debts (and troubled governments owe even more) + inflation is good for debtors (because it erodes the value of the money they must pay back) + governments control the inflation rate = governments can cut their own debts by pulling the inflation rip cord
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inflation || inflation tax
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you have not physically taken money from their wallets; instead, you've done it by devaluing the money that stays in their wallets
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alan greenspan/janet yellen
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AG - P. Vocker was upset AG sat next to H. Clinton at dinner because he believed it was inappropropriate (sent the wrong message about the Federal Reserve's independence from the executive branch); JY - current Fed chairman
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federal reserve board
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political independence is crucial if monetary authorities are to do their jobs responsibly; America's Federal Reserve is among those considered to be relatively independent; members of its board of governors are appointed to fourteen-year terms by the president; it is notable- and even a source of criticism- that the most important economic post in a democratic government is appointed, not elected
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deflation
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steadily falling prices; falling prices cause consumers to postpone purchases; asset prices are falling, so consumers feel poorer and less inclined to spend; consumers spend less, economy grows less; a "deflationary spiral" in which falling prices and a slumping economy feed on each other, plunging the economy into the abyss
