How our Central Bank is structured The Federal Reserve How our Central Bank is structured

3 Primary Functions of Fed Regulates banks ensure banks follow laws Acts as Banker’s Bank making loans to banks => lender of last resort Conducts Monetary Policy regulates money supply to control short term interest rates

Critical Thinking Why & How is the Fed independent from Government?

The Federal Reserve System Federal Reserve Board (7-Governors in Washington) 12-District Banks Ben Bernanke Chairmen of Fed Term ends Jan. 2014 Re-appointed for 2nd term

Federal Open Market Committee (FOMC) Main policy-making part of Federal Reserve (12 members) Meets 8-times to vote on Monetary Policy

2 Primary Goals of Fed Stable Prices Maximum output & employment Goal #2 Stable Prices What makes these 2-Goals in direct conflict? Answer: High GDP & Low Unemployment can lead to inflation i.e. solving goal #1 often will risk failing at goal #2

2-Types of Inflation Demand-Pull Inflation: Cost-Push Inflation Too many dollars chasing too few goods Spending increases faster than production Demand Side Inflation Cost-Push Inflation Increase in cost of any factors of production (input prices) examples: price of oil, labor, steel, etc….) Supply Side Inflation

Quantitative Easing Fed controls only short term interest rates http://www.npr.org/blogs/money/2010/10/07/130408926/quantitative-easing-explained Fed controls only short term interest rates Which are already at ZERO percent Traditional monetary policy can’t do anymore Goal: is to solve the credit crunch Get banks to make loans again… Strategy: buy Gov’t bonds to lower long term interest rates Lower interest rates => lead to more investment

Bernanke’s Plan: 2010 U.S. Economy LRAS1 Price Level SRAS1 AD1 Real GDP