1. The Federal Reserve Goals & Challenges

2. MONEY Money- anything used to facilitate the exchange of goods & services between buyers and sellers

3. 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

4. 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

5. 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

6. 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)

7. 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