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 which 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

countercyclical: 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 either hold as cash in their vault or deposit with the central bank

tight monetary policy: see contractionary monetary policy

velocity: the speed with which money circulates through the economy; calculated as the nominal GDP divided by the money supply

Access for free at https://openstax.org/books/principles-economics-3e