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The Federal Reserve

The Federal Reserve

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Published by UtahApoc

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Published by: UtahApoc on Jun 12, 2009
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09/21/2010

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1 The Federal Reserve and Inflation The Federal Reserve and InflationHow the Fed affects the economy and inflationDamon TalbotComposition 2Shayler WhiteApril 29, 2009Damon Talbot Federal Reserve & InflationComp II
 
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The Federal Reserve is a private bank that was set up in 1913 by the FederalReserve Act. It is independent from the government and is able to determine its owndecisions. However the Chairman of the Fed is selected by the President and confirmedby congress. The original intent was “to provide for the establishment of Federal reservebanks, to furnish an elastic currency, to afford means for rediscounting commercialpaper, to more effectively supervise banking in the United States, and for other purposes.” (Hon. Carter Glass, Chairman of the Banking and Currency Committee,1913) The Federal Reserve is directed by a Board of Governors all nominated by thePresident and confirmed by the senate. Since beginning operations in 1914 they havemaintained twelve Federal Reserve banks in major cities across the U.S. One of themost important groups is called the Federal Open Markets Committee (FOMC) whichoversees three of the Feds most important duties. Buying and selling of United Statesgovernment securities, altering reserve requirements that set the amount of funds bankmust hold against deposits, and changing the interest rate used for commercial banks. Iwill discuss how the decisions of the Federal Reserve affect the economy, the inflationrate, and the prices of goods and services in the United States.The Federal Reserve affects the economy in several ways. By changing interestrates it can give investors a clear picture of our overall economic status. A raise ininterest rates is typically a sign that the economy is stable and strong. Lowering of theinterest rates usually is done when things are sluggish and not doing as well. Theexchange markets tend to sell off stocks at the higher interest levels to get a larger return on investment. With a lower rate they will usually buy more taking advantage of the lower prices. A separate function is to maintain a level cash flow to U.S. Typicallybanks do not have cash on hand in their vaults to cover all the deposits in thatinstitution. A bank run happens when some factor triggers a panic and persons all makewithdraws. To help prevent a run on the banks the Federal Reserve will give credit tothe U.S. Treasury to print and release more cash into circulation. These increases incash flow can create inflation, or even hyperinflation.
Damon Talbot Federal Reserve & InflationComp II
 
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Inflation is the ongoing change in value of a countries currency. As the FederalReserve allows more cash to be printed the value of that money is lowered. Think of itthis way; you divide a pizza into eight slices to feed your friends, suddenly four morebuddies arrive so you get the cutter out and slice the pie into a total of twelve pieces.Now you still have the same amount of pizza but each piece is not as filling as before.The same works with currency; as more money is printed and placed into circulationthen it is not worth as much and has less buying power. Representative Ron Paul hadthis to say about the Federal Reserve and inflation “Printing money, which is literallyinflation, is nothing more than a sinister and evil form of hidden taxation. It’s unfair anddeceptive, and accordingly strongly opposed by the authors of the Constitution. That iswhy there is no authority for Congress, the Federal Reserve, or the executive branch tooperate the current system of money we have today.”(http://www.house.gov/paul/congrec/congrec2003/cr090503.htm)If inflation continues then you can reach even higher levels called hyper inflation.In 2006 in Zimbabwe the inflation levels hit unprecedented levels. They had to beginprinting larger and larger denominations of dollars to keep up with the rising prices. Atone point that had gotten to the point of have multibillion dollar bills. The money wasactually worth more as a novelty sold online then as value for goods or services in thatcountry. “Ashes are all that is left of the Zimbabwe dollar — a remnant of paper money.During Zimbabwe’s hyperinflation, foreign currencies replaced the Zimbabwe dollar in arapid and spontaneous manner.” (Steve H. Hanke, the Cato Institute, June 25
th
2006”As inflation goes up, and the value of your currency goes down then businesses mustraise prices. These price increases typically are passed down the chain to theconsumer. In Zimbabwe prices become so extreme that a bottle of beer could cost $50billion dollars. The Federal Reserve attempts to halt inflation by manipulating themarkets and cutting off the flow of new currency. Depending on the situation though thiscan then trigger issues with the overall economy. If there is not enough inflation thengoods and services cost less for the consumer, but are not as profitable for thebusinesses.
Damon Talbot Federal Reserve & InflationComp II

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