The Federal Reserve
Goals & Challenges
MONEY
• Money- anything used to facilitate the exchange of goods & services between buyers and sellers
2 Kinds of Money
• Commodity money takes the form of a commodity with intrinsic value– Examples: Gold, silver, cigarettes
• Fiat money is used because of Government decree– It does not have intrinsic value– Examples: Coins, currency, check deposits
– U.S. money was backed by gold until 1971
Money Supply
• Total amount of money in circulation
• Federal Reserve “controls” size of the money supply– U.S. uses fiat currency
• Changing the money supply directly affects short term interest rates and future inflation
• Rapidly ↑ Money Supply leads to high inflation
The Federal Reserve
• Central Bank of the United States– Independent from Government
• 2 Primary goals: – #1- Maximum Output & Employment– #2- Stable Prices
• Federal Reserve’s regulates the Money Supply– This is how they change short term interest rates (federal funds rate)
Ben Bernanke Chairman
2 Conflicting Goals?
Maximum output & employment
(High GDP & Low Unemployment)
Stable Prices(low inflation)
What makes these 2-Goals in direct conflict?
High GDP & Low Unemployment (goal #1) increase inflationary pressures (hurts goal #2)
Federal Open Market Committee (FOMC)
• Main policy-making part of Federal Reserve (12 members)– Meets 8-times to vote on Monetary Policy
– Their job is to regulate the money supply