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The Federal Reserve How our Central Bank is structured Critical Thinking • How & Why is the Fed independent from Government? How? Why? 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%) 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 2nd term 2009 Federal Open Market Committee (FOMC) • Main policy-making part of Federal Reserve (12 members) – Meets 8-times per year to vote on Monetary Policy ↑ Money Supply => ↓ Short term interest rates Federal Reserve in action 1999 - 2012 0.0% 2012 2 Primary Goals of Fed What makes these 2-Goals in direct conflict? Goal #1 Goal #2 Maximum output & employment Price Level Stable Prices LRAS1 SRAS1 AD1 Real GDP Answer: High GDP & Low Unemployment can lead to inflation i.e. solving goal #1 often will risk failing at goal #2 Video Interview #1: Bernanke’s Plan: U.S. Economy Price Level LRAS1 AD1 Real GDP SRAS1