1. Monetary Policy & Inflation
I create money out of “thin air”
I sell bonds to raise money for Gov’t Spending
Monetary Policy & Inflation

2. 2 Types of Monetary Policy
Review:
2 Types of Monetary Policy
Expansionary (loose) Monetary Policy
Goal: to increase the money supply => ↓ Short Term Interest rates ↓
Contractionary (tight) Monetary policy
Goal: to decrease the money supply => ↑ Short Term Interest rates
Peak
Trough
GDP

3. Fed Changes 2 Interest Rates
Discount Rate- interest rate at which Banks borrow directly from the Fed
It is only used in an “emergency”----Fed is the “lender of last resort”
Federal Funds Rate- rate banks borrow directly from each other
Currently 0.0% => this is the one you graph! MD
Interest
Rate
Qty of $
MS1 i1

4. Higher interest rates =>
Economic Situation:
GDP growth at +5.0%,
Inflation rising, Unemployment 3.0%
Solution: Tight Monetary Policy
↑ Discount Rate
Sell Bonds ↓MS => ↑Federal Funds Rate
MS1 MD
Interest
Rate
Qty of $
MS2
Affects AD i2
Higher interest rates =>
Less Loans taken by Consumers & Business
C ↓ + I ↓ => so AD ↓ i1
End Result: Lower GDP & less inflation!

5. Inflation Recap
10 minutes

6. The Impact of “creating Money”
The Fed prints $1 billion dollars
Who wins? Who loses
Inflation is a benefit to borrowers & the rich
Inflation is considered a tax on savers & the poor

7. Bernanke Interview Part II

8. Bernanke Interview Recap
Bernanke’s Structural Solutions