Federal Reserve: iInflation

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The Federal Reserve, or the Fed, is the agency responsible for regulating the quantity of money in the US economy and for ensuring the health of the banking system (Mankiw, p. 634). The Fed's functions are comparable to the functions of a central bank, such as the Bank of England or the European Central Bank.


It also acts as the bank's bank, meaning that the Fed is the lender of last resort to banks that need to borrow money to maintain stability. Fed's second and most important task is to control money supply. A special committee at the Fed Reserve - the Federal Open Market Committee - directs the US monetary policy.
Natural disasters cause inflation. This is so, because natural disasters, such as hurricanes or earthquakes cause losses that reduce real variables, such as physical products or property. This increases the demand for these variables, because people need to restore the physical losses. Higher demand and decreased output has the effect of increasing price levels and people have to pay more dollars the same quantity of goods and services.
For example, after Hurricane Katrina, and Hurricane Rita energy prices increased significantly (Olson, 2005), because of limited supply and increased demand for gas and petroleum products. Higher gasoline, natural gas and petroleum products prices led to increased costs of other goods and services, such as transportation and building materials. Higher price levels reflected in a higher inflation rate.
The Fed is run by a Board of seven governors appointed by the President and confirmed by the Senate (p. 634). ...
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