Essential Economic & Monetary Policy Concepts
Classified in Economy
Written on in 
English with a size of 3.13 KB
Key Economic Indicators & Labor Market Concepts
Macroeconomic Goals & Measures
Monetary Policy: Changes in the money supply, or the rate of growth of the money supply, to achieve particular macroeconomic goals.
Consumer Price Index (CPI): A widely cited index number for the price level; the weighted average of prices of a specific set of goods and services purchased by a typical household.
Unemployment & Employment Metrics
Unemployment Rate: The percentage of the civilian labor force that is unemployed.
Formula: Number of unemployed persons / Civilian labor force
Employment Rate: The percentage of the civilian non-institutional population that is employed.
Formula: Number of employed persons / Civilian non-institutional population
Labor Force Participation Rate: The percentage of the civilian non-institutional population that is in the civilian labor force.
Formula: Civilian labor force / Civilian non-institutional population
Natural Unemployment Rate: Unemployment caused by frictional and structural factors in the economy.
Formula: Frictional unemployment rate + Structural unemployment rate
Cyclical Unemployment Rate: The difference between the unemployment rate and the natural unemployment rate.
Full Employment: The condition that exists when the unemployment rate is equal to the natural unemployment rate.
Monetary Policy & Banking Fundamentals
Functions of Money & Banking Basics
Functions of Money: It's a unit of account, a medium of exchange, and a store of value. These functions are:
- Unit of account
- Medium of exchange
- Store of value
Total Reserves of Banks (TR): Vault cash plus deposits at the Federal Reserve.
Net Worth (Capital): Assets - Liabilities
Multiplier Effect: Each $1 injected into the economy by the Fed gives rise to a money supply that is several times as large as the original $1.
Federal Reserve Tools & Interest Rates
Open Market Operations: Purchases and sales of government securities (bonds) by the Fed, the number one most important policy tool used to control the money supply.
Discount Rate Policy: Changes in the interest rate the Fed charges banks to borrow reserves.
If the Fed sells bonds: This decreases total reserves in banks, which decreases checking deposits and the money supply.
Discount Rate: The interest rate the Fed charges depository institutions that borrow reserves from it.
Reserve Requirement: The rule that specifies the amount of reserves a bank must hold to back up deposits.
Federal Funds Rate: The interest rate in the federal funds market; the interest rate banks charge one another to borrow reserves.
Nominal Interest Rate