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The Federal Reserve

U.S. Central Bank; Purpose: to control the supply of credit and money to achieve stable prices, full employment, economic growth.

Open Market Operations

The buying and selling of Treasury Securities (Bonds) by the Federal Reserve in order to control the money supply

Reserve Requirement

the percentage of deposits that banking institutions must hold in reserve

Discount Rate

interest rate that the Fed charges for loans to member banks

Federal Funds Rate

the interest rate at which banks make overnight loans to one another

Monetary Policy

the actions the Federal Reserve takes to influence the level of real GDP and the rate of inflation in the economy

Expansionary Monetary Policy

Federal Reserve system actions to increase the money supply, lower interest rates, and expand real GDP; an easy money policy = Buying Bonds, Lowering the Discount Rate and Reserve Requirement

Contractionary Monetary Policy

Contracting the supply of money and increasing interest rates to decrease Aggregate Demand and ultimately decrease inflation = Selling Bonds, Raising the Discount Rate and Reserve Requirement


a measure of the money supply

Money Multiplier

1 / reserve requirement: the multiple by which the money supply will change because of a change in bank reserves

The Three Functions of Money

1. medium of exchange
2.unit of account of value

Ben Bernanke

Current chairman of the Federal Reserve System. Replaced Alan Greenspan in 2006.

Fiscal Policy

an attempt to use taxes and expenditures to affect the economy

National Debt

the total amount owed by the federal government


What occurs when the government in one year spends more money than it takes in from taxes.

Regressive Taxes

tax in which people with lower incomes pay a larger portion of their income

Proportional Taxes

taxes that require all income groups to pay the same percentage of their income in taxes

Progressive Taxes

A tax rate that increases as the amount of ones income increases

Economic Growth

increase in a nation's total output of goods and services over time

Aggregate Demand

the demand for all goods and services by all households, business, governments, and foreigners

Aggregate Supply

The total amount of goods and services in the economy available at all possible price levels.

Positive Externality

a benefit received by someone who had nothing to do with the activity that generated the benefit

Negative Externality

the harm, cost, or inconvenience suffered by a third party because of actions by others

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