Monetary Policy Concepts

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Monetary Policy

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The process by which the central bank controls the supply of money and interest rates to achieve specific economic goals, such as stable prices and maximum employment.

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Federal Reserve (the Fed)

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The central banking system of the United States responsible for implementing monetary policy and regulating financial institutions.

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Interest Rates

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The cost of borrowing money or the return on investment. The Federal Reserve influences interest rates to stimulate or cool down economic activity.

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Inflation

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The rate at which the general level of prices for goods and services rises, eroding purchasing power. The Fed aims to keep inflation in check.

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Deflation

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The opposite of inflation; a decrease in the general price level of goods and services. Persistent deflation can have negative effects on the economy.

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Open Market Operations

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The buying and selling of government securities by the Federal Reserve in the open market to control the money supply and influence interest rates.

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Quantitative Easing (QE)

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An unconventional monetary policy in which a central bank purchases financial assets to increase the money supply and encourage lending.

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Central Bank

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A financial institution responsible for managing a country's money supply, controlling interest rates, and ensuring the stability of the financial system.

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Federal Funds Rate

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The interest rate at which banks lend to each other overnight. It serves as a benchmark for many other interest rates.

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Fractional Reserve Banking

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A banking system in which banks are required to hold only a fraction of their deposits in reserve, allowing the rest to be loaned out.