1. The Federal Reserve How our Central Bank is structured

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

3. 3 Primary Functions of Fed Regulates banks –ensure banks follow laws (housing bubble—what happened?) Acts as Banker’s Bank –Makes emergency loans to banks => “lender of last resort” –Discount rate: interest rate Fed charges banks (currently 0.75%) Conducts Monetary Policy –regulates money supply to control short term interest rates –Federal Funds Rate: interest rate Fed sets (currently 0.0%)

4. The Federal Reserve System Federal Reserve Board (7-Governors in Washington) 12-District Banks Ben Bernanke Worked at Fed since 2002 Chairmen of Fed since 2006 (Term ends Jan. 2014) Re-appointed for 2 nd term 2009

5. Federal Open Market Committee (FOMC) Main policy-making part of Federal Reserve (12 members) –Meets 8-times per year to vote on Monetary Policy ↓ Short term interest rates ↑ Money Supply =>

6. Federal Reserve in action 1999 - 2012 2012 0.0%

7. 2 Primary Goals of Fed Goal #1 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 LRAS 1 Price Level Real GDP AD 1 SRAS 1

8. LRAS 1 Price Level Real GDP AD 1 Video Interview #1: Bernanke’s Plan: U.S. Economy SRAS 1