Federal Reserve and Inflation

Essay by honeylove130College, UndergraduateB, October 2007

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�PAGE � �PAGE �3� Federal Reserve and Inflation

Federal Reserve and Inflation

Jennifer Myers

Western International University

ECO/301 Economic Theory

Gloria Pearson

February 25, 2007

What exactly is the Federal Reserve? The Federal Reserve is an agency that is responsible for regulating the system using fiat money. Fiat money is notes issued by the fed. The Federal Reserve is a central bank that oversees the banking system and regulates the quantity of money in the economy. There are other central banks in other countries such as the Bank of England, Japan and European Central. These banks regulate and ensure the health of the banking system and control the amount of money available to the economy. The fed acts as a banks bank. Banks sometimes have financial troubles and make loans just as consumers make loans. (Mankiw, 2004 p.634)

Do the effects of natural disasters such as hurricanes cause inflation or deflation? I believe it can cause both.

People have lost their jobs and homes. There is also the lost of jobs from companies that will not be rebuilding. Money will become more valuable to people who are affected by natural disasters because of the loss of jobs. The economy will inflate or deflate and be stimulated because it has to be replaced. Natural disasters destroy business and homes. The price for materials and labor to rebuild will increase because of supply and demand. The prices on homes for sale will increase and the cost for insurance on homes in flood areas will rise. (Mankiw, 2004 p.656)

Who is in charge of the Fed? The Board of Governors of seven members appointed by the president and confirmed by the senate runs the Fed. Among the seven members is the chairman. The Federal Reserve System consists of a Federal Reserve Board in...