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Monetary Policy and the Federal Reserve
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Monetary Policy and the Federal Reserve

The Power and Limitations of the Federal Reserve

This video discusses the power and limitations of the United States' central bank, the Federal Reserve. It explains how monetary policy can affect real growth in the short run but has limitations in the long run due to sticky prices. The video also highlights some difficulties that the Fed faces, such as incomplete data and a lack of direct control.

The Power of the Federal Reserve

  • The Fed has more power to affect the economy than any other institution.
  • The Fed can create money, buy trillions in government bonds, and act as a lender of last resort.
  • The chairperson of the Federal Reserve is arguably the second most powerful person in the United States after the president.

Limitations of Monetary Policy

  • Monetary policy can only affect real growth in the short run due to sticky prices.
  • Real GDP is determined by fundamental factors such as human and physical capital and good institutions.
  • Incomplete data, lagged results, and a lack of direct control make it difficult for the Fed to affect aggregate demand in the short run.

Difficulties Faced by the Fed

  • At times, the Fed has made things worse rather than better.
  • Defining what counts as money isn't easy.

Defining Money

This section dives into defining what counts as money.

What Counts as Money?

  • Paper money and coins count as money.
  • Checking accounts may also count as money.
  • Gift cards may or may not count as money.
Playlists: Economics [Intermediate] Pt.1 Principles of Economics: Macroeconomics Unit 10: Monetary Policy and the Federal Reserve
Video description

Spider-Man fans likely recall Uncle Ben advising his nephew, Peter Parker, that “With great power, comes great responsibility.” As it turns out, that sage wisdom is also pretty applicable to the U.S. Federal Reserve System (aka the Fed). The Fed Chairperson, currently Janet Yellen, may not shoot webs out of her wrists, but she and the organization she represents have some super powers over our money supply. The Fed also has quite a few limitations – monetary policy can only do so much. We’ve previously covered the quantity theory of money and long- and short-run economic growth. If you think back to those videos, you’ll remember that an increase in the money supply (which, in the U.S., is controlled by the Fed) only affects growth in the short-run. Even then, it’s often not smooth sailing. In this video, we’ll give you an introduction to the function of the Fed as well as some of the problems it faces, and raise the question, “What is money?” Subscribe for new videos: http://bit.ly/1Rib5V8 Macroeconomics Course: http://bit.ly/1R1PL5x Next video: http://bit.ly/2t08M3A