Is 1 million dollars worth more in 2017 or in the 1960? Explain why Question Is 1 million dollars worth more in 2017 or in the 1960? Explain why https://www.youtube.com/watch?v=jTmXHvG ZiSY https://www.youtube.com/watch?v=cKKHSAE 1gIs

What is inflation? Inflation: when the general level of prices rise in the economy As inflation rises, every dollar you own buys a smaller amount of a good or service. Causes include strong demand, rising costs, and most importantly the growing supply of money in the economy More $$$ supply = More inflation

Examples of Goods A new home in Brooklyn, NY cost $2,500 (1853) A routine doctor’s visit cost $2 (Florida, 1852) A dozen pairs of Levi Strauss blue jeans cost $13.50 (1874) One pair of shoes cost $0.98 (1875) One suit cost $10.00 (1875) One Oldsmobile cost $650 (1904) Total annual cost of Cornell University, including living expenses was $1,400 (1927) One movie ticket cost $1 (Chicago, 1978)

So… Is inflation good or bad? (Hint: Think of the pic)

Hyper Inflation Hyperinflation: When inflation goes insanely high! Can you imagine trying to spend millions of dollars just trying to buy food? Welcome to Zimbabwe… https://www.youtube.com/watch?v=mM3_z2RB3YU

Consequences Today Too much money creates inflation and increases the possibility of a recession The main issue today is that wages are not rising fast enough to meet rising prices Economic Inequality

CPI Consumer Price Index: used to measure price changes over time for commonly used goods/services Most accurate way to measure inflation http://www.cnbc.com/2015/09/01/the- abcs-of-cpi-what-is-the-consumer-price- index.html

Bellwork Imagine if you went to the bank to withdrawal $100 and they did not have the money. How would you react? What would you realistically do? How would society react if all of our banks closed because of a collapse or crisis of some kind?

We the Economy Fed Head https://www.youtube.com/watch?v=BwZzZda KMDQ

The Federal Reserve and Monetary Policy

Roles and responsibilities of the Federal Reserve System The Federal Reserve Act of 1913 created the Federal Reserve System (the “FED”) to serve as the central bank of the United States. Responsibilities of The FED: Holds required reserves (“the bankers’ bank”) Lends money to banks (“lender of last resort”) Sets monetary policy Regulates banking operations Issue paper currency Collect and clear checks

The Federal Reserve System Member Banks

The Federal Reserve District Banks Philadelphia | Richmond | San Francisco | St. Louis                                                                           The Federal Reserve District Banks In which Federal Reserve district do you live? In which city is your district’s Federal Reserve bank located?

Where did this bill originate? This bill has a 12 on it indicating San Francisco. This is also denoted by the “L” on the seal. “L” is the 12th letter in the alphabet corresponding to the 12th district. Notice, too that there is an “L” in front of the bill’s serial number.

Where did this bill originate? In this bill, the “E” before the 5 also indicates the District bank. The letter E is the fifth letter in the alphabet so both the letter and number give the answer to where it came from. If there is no letter on the seal (newer higher denominations), the letter can be found before the number (E5).

The Bankers’ Bank - Reserves FED district banks monitor the required reserves of member banks Member banks must have a certain amount of reserves on hand at the end of each day (required reserves) Member banks can deposit excess reserves in the FED district banks

The Bankers’ Bank - Borrowing If a bank needs to borrow money it can borrow it from: Another bank OR The FED district bank (“lender of last resort”) The Discount Rate is the interest rate the FED charges for loans to its member banks.

Monetary Policy Defined: The actions that the Federal Reserve take to influence the money supply to achieve their stated macroeconomic goals of price stability and full employment. Ways the FED Influences the Money Supply: Increase / Decrease the Reserve Requirement Increase / Decrease the Discount Rate Buy or Sell U.S. securities (Treasury notes, bills, bonds)

The Money Supply Is a measure of the total amount of money in an economy The FED influences the money supply to achieve macroeconomic goals of: Price stability Full employment Economic growth The FED’s legislative mandate is to work on price stability and full employment. Economic growth is a consequence of achieving the other two. However, the content expectations note all three economic goals so we have done so too in this PowerPoint for consistency.

The Money Supply and Interest Rates The FED influences the amount of lending and borrowing by using its tools to influence the money supply By influencing the money supply, the FED indirectly influences the interest rate Think of the interest rate being equivalent of the price of a good or service. Low interest rates= more borrowing (like low price= more buying) High interest rates= less borrowing (like high price= less buying) Interest rates reflect the interaction of lenders (who supply the funds) and borrowers (who demand the funds) The FED uses reserve requirement, discount rate, and the buying and selling of securities to influence the money supply. For example, if the FED increases the reserve requirement, banks must have more money set aside (reserve requirement) and therefore have less to lend. Returning to our days of supply and demand, if there is less money available for borrowers, the price (interest rate) will be higher. Similarly, if the FED raises the discount rate, banks will be less likely to borrow from the FED because the costs are higher. Therefore, these banks will have less to lend the borrowers, ultimately driving up interest rates. Finally, if the FED wants banks to have higher interest rates, the Federal Open Market Committee (FOMC) can sell US securities. Those exchanges cause the FED to take money from banks, leaving less for borrowers. This will also raise interest rates.

Review: FED Sets Monetary Policy By: Increasing/Decreasing the Reserve Requirement Increasing/Decreasing the Discount Rate Buying/Selling U.S. securities (Treasury Notes, Bills, Bonds) through FOMC (Federal Open Market Committee)

“Easy Money” Monetary Policy Used when the FED wants to stimulate growth due to a contracting economy Effects/Consequences Increases the money supply and inflation, Which leads to lower interest rates Encouraging investment , spending, and employment

“Tight Money” Monetary Policy Used when the FED wants to slow growth due to a rapid expansion that may cause inflation Effects/Consequences Decreases the money supply, Which leads to higher interest rates Discouraging investment and spending Which can lead to lower employment