1. Today’s Warm Up  Can nations fix social ills like poverty, homelessness, and starvation by printing more money? Why or why not?

2. Today’s LEQ: Why was/are there problems with the banking system in command economies? “There have been three great inventions since the beginning of time: Fire, the wheel, and central banking.”

3. Recall: Central Bank & Monetary Policy  Central Banks – financial institution established by the nat’l gov’t; tries to maintain price stability through monetary policy  Monetary Policy – controlling the amount of money and the availability of credit in the economy

4. Functions of the Central Bank  Conduct monetary policy  Act as the national government’s bank  Serve as banker’s bank  Regulate some transactions at banks and other financial institutions  (VISUAL 2)

5. Central Bank & Monetary Policy  To combat inflation: Decrease money supply Decrease amount of credit available  CONTRACTIONARY  To combat deflation: Increase money supply Increase amount of credit available  EXPANSIONARY

6. Inflation and Money Supply  When a country transitions, price controls are removed and inflation can become a BIG problem (i.e. Soviet Union during the 1990s) Inflation - an increase in the general price level of any economy (opposite = deflation)  Unfortunately, some transitioning nations thought increasing their money supply could solve the problem…  What do you think happened?

7. Inflation and Money Supply Growth Rates,1987-1997 (VISUAL 3)

8. Central Banking Independence  Market economies: central banks are independent from the legislative and executive branches of the government  Command economies: central planners determine monetary policy

9. Consider the following scenario…  In the year 2012, inflation is a serious problem in the U.S. economy, so the Federal Reserve System tightens the money supply and reduces the availability of credit, which causes interest rates to rise. Meanwhile, President Obama, all of the House of Representatives, and a third of the Senate are running for re-election.  How do you think these political candidates will feel about the results of the new monetary policy?

10. Central Banking Independence  There is a correlation between high central banking independence and a low rate of inflation  WHY? Central bank officials who are not elected can better hold the line against inflation! ○ Less pressure to create or print new money to fund government borrowing for new programs ○ Can act in ways that make better sense for the economy (even if it’s not politically popular)

11. Activity 2 / Visual 4 – Central Bank and Inflation  What is the relationship between central bank independence and inflation?

12. Central Banking Independence and Inflation

13. The BIG Concepts!!!  Inflation is directly related to increases in the money supply  Central banks are created by governments in most nations to conduct monetary policy.  The more independent a nation’s central bank is from political control and pressure, the lower the inflation rate in the nation tends to be (increasing overall prosperity)

14. Visual 6  Identify the three countries that are most likely to have independent central banks.  Explain your choices.