Inflation and the fed

Chapter 10 Inflation

* The Federal Reserve controls the money supply, having the power to lower interest rates; hence, people spend more freely on things that requires borrowed money.
*Federal Reserve is made up of twelve banks, spread throughout the country, with a board of seven governors.
* Federal Reserve regulates commercial banks and the banking infrastructure, thus makingthe financial system work.
* When demand exceeds supply companies can raise their prices and still sell every unit produced.
* The only way to attack the excess in demand is with higherprices, inflation.
* When there is a big demand companies need to employ more people in order to produce more units, with will cost more to the company even though they are producing more and thereforereceiving more money. Although the workers are receiving more money they are also paying higher prices for their basic needs.
* There is a limit for how much the GDP can grow without havinginflation. Economists have stated that the “speed limit” for the economy is 3% growth per year.
* Federal Reserve chairman William McChesney “take away the punch bowl as the party is going.” (Expand onparty theory)
* The Federal Reserve moves rates by changing the available money in circulation.
* The Federal Reserve exchanges money with banks for bonds, banks receive the money, but theyhave to keep some portion of this fund in reserve by law. The process in which the Federal Reserve trades bonds for money is called open market operations and will continue to do this until the targetfederal funds rate has been reached. To slow the economy growth the Federal Reserve raises interest rates making anything purchased with borrowed money more expensive.
* Inflation means averageprices are going up, but a better way to define inflation is that the purchasing power of the dollar is going down.
* Any wealth held in cash will lose value over time.
* Inflation is not...