Out of the mouths of babes: “Why does the Fed print money if it causes inflation”?

This summer I have been teaching a twice a week financial literacy seminar for high school sophomores at Ramapo College.  The students from Paterson, one of the state’s relatively poor urban centers, are going to class five days a week for Math, Science and other subjects.

Today, we discussed some basic concepts about investing,  I began by asking students if consumer prices will probably increase in the future.  I said that higher prices will lower their living standards if their salaries and/or other income do not keep up with the decline in the dollar’s purchasing power.  I then mentioned that the Federal Reserve is responsible for higher prices because they “print money,” or, as I like to say, the Fed has an unlimited checking account, which allows it to create new money that enters the economy through the banking system and causes prices to rise.

As we were finishing this segment, one student raised his hand and asked: “Why does the Fed print money if it causes inflation”?  I said that is the $64 million question.  The Fed thinks printing money will stimulate the economy and create jobs and produce prosperity.  I told the class to come to Ramapo College and take my Financial Markets and Institutions course so we can discuss this further.

Youngsters get it.  Creating money causes price inflation.  If only Bernanke et.al., knew as much as high school sophomores, then the Fed’s unlimited checking account would be retired.

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