About This Chapter
The Central Bank & Monetary Policy - Chapter Summary
Study this chapter to review monetary policy and the Federal Reserve system in the United States. Inside the chapter, you'll find informative lessons that cover the responsibilities of the Central Bank and how it affects various financial factors. As you progress through the chapter, you'll examine interest rates, money supply, private investments and other financial concepts. Studying this chapter can equip you to:
- Define the Federal Reserve system's financial goals and core responsibilities
- Outline the Central Bank's reserve requirement, open market operations and discount rate
- Describe the effect the reserve ratio has on money supply and how the Federal Reserve affects interest rates
- Understand why banks borrow money from the Federal Reserve
- Explain the quantity theory of money and velocity of money
- Differentiate between real and nominal interest rates
- Analyze the relationship between real interest rates and private investments
- Evaluate the ways in which money supply affects rising prices in the Consumer Price Index
Our expert instructors design each lesson to be engaging and simple so you can quickly break down important financial concepts and definitions. Make sure you fully understand these monetary policy concepts by taking the self-assessment quizzes that follow each lesson. For your convenience, you can study this chapter at your own pace whenever it fits your schedule.
1. What is the Federal Reserve System?
Have you ever wondered why interest rates go up and down, seemingly at random? Of course you have! Discover what the Federal Reserve is, what its goals are and how those goals are achieved in this introductory lesson explaining the central bank of the United States.
2. Reserve Requirement, Open Market Operations and the Discount Rate
This lesson outlines the three main tools used by the central bank to conduct monetary policy, including open market operations, required reserves and the discount rate.
3. Open Market Operations & the Federal Reserve: Definition & Examples
This lesson explains the most frequently used monetary policy tool of the central bank, open market operations. Using examples, you'll go inside the formula of the money multiplier and see how the Federal Reserve effectively controls the interest rate of the economy.
4. How the Reserve Ratio Affects the Money Supply
Where does our supply of money come from. Well, it's in the hands of the Federal Reserve. In this lesson, discover how the central bank can dramatically alter the supply of money in the economy by changing the reserve requirements of the banks it oversees.
5. The Discount Rate & Monetary Policy: How Banks Can Borrow Money from the Federal Reserve
Learn more about the discount rate, which is the rate that banks pay to the central bank when borrowing money. This lesson explains how changes in the discount rate affect the money supply and how the central bank can use the discount rate as part of monetary policy.
6. How the Federal Reserve Changes the Money Supply and Affects Interest Rates
Discover the connection between the money supply and economic output and how the central bank's tools lead to an increase or decrease in real GDP via expansionary and contractionary monetary policy.
7. Quantity Theory of Money: Output and Prices
This lesson explains the quantity theory of money and how to apply it, including the idea that an increase in the money supply leads to inflation in the long run.
8. The Velocity of Money: Definition and Circulation Speed
Learn about the method economists use to measure how fast money changes hands throughout the economy, referred to as the velocity of money. With the help of an imaginative story, this lesson defines the concept of velocity as well as what determines it.
9. Real vs. Nominal Interest Rates and Changes in Prices
This lesson explains the important difference between nominal and real interest rates and provides examples of how to use the Fisher equation to adjust nominal rates for inflation.
10. Private Investment and Real Interest Rates
When you borrow money, where does that money come from and why is it available? In this lesson, you'll learn about the market for loanable funds, where savers deposit money and entrepreneurs borrow money to finance private investment.
11. Hyperinflation, Money Supply and the Consumer Price Index
Is there such a thing as too much money? Maybe. What happens when inflation is excessive? This lesson explores what hyperinflation is and how it is connected with the money supply.
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