4. The Objectives of Monetary Policy
g. contrast the costs of expected and unexpected inflation;
h. describe tools used to implement monetary policy;
i. describe the monetary transmission mechanism;
k. explain the relationships between monetary policy and economic growth, inflation, interest, and exchange rates;
What is unanticipated inflation?
Unanticipated inflation is an increase in the general level of prices that was not expected by most decision makers. It is a surprise to most individuals. Unanticipated inflation redistributes income, creates uncertainty, and can have a potentially destabilizing impact on the economy.
What are the three major means that central banks have to control the stock of money?
1. Open Market Operations - when they buy government securities from commercial banks
2. The Central Bank's Policy Rate - loans to banks if they find themselves in a position where they're not holding enough reserves (they made too many loans)
3. Reserve Requirements - how much reserve banks are required to keep. Rarely modified.
What is the "repo rate" or "discount rate"?
The repo (or discount) rate is the interest rate that the central bank charges when banks take loans.
What is the federal funds rate?
When banks have excess reserves they extend short-term loans to other banks. The interest charged on this money is called the federal funds rate.