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

2. 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

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

4. 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

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

6. 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

7. 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

8. Quantitative Easing Fed controls only short term interest rates
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

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