Federal Reserve Paper

Federal Reserve Paper

Iris Harris University of Phoenix

ECO/212 Principles of Economics

November 1, 2010

Steven Wynne

Federal Reserve Paper

The national bank of the Federal Reserve is the central bank of the United States. One important responsibility of the Federal Reserve deals with the monetary policy of the Unites States. This paper will explain the purpose and function of money it will also explain how the central bank manages a nation's monetary system. The paper will also outline the stated direction of recent monetary policy in the Unites States. Along with a listing, at least one policy action that the Federal Reserve has taken to confirm that direction. The last I will explain will be the effects of monetary policies on the economy's production and employment.

The Purpose and Function of Money

Money makes the world go round, and money is something that people need and use each day across the world. Money is used to buy food, cars, homes and pay bills "etc"; however, is it also used to put value on product in the marketplace. Money is use as an instrument that people are willing to exchange for goods and service or payment on a bill. Money makes the economic transactions easier, and makes life easier for people. The relationship between prices and the value of money in the economic influences the increases and the decreases the product. Money is used to perform three functions they are medium of exchange, unit of exchange, and store of value. These functions have a distinguishable over assets in the economy such as stocks, land, bonds, and arts (Heshmeyer, 2009, p. 15)).

Medium of exchange is an important function in facilitate transactions between two people. The transactions are more productive when there is an exchange for a good or service for another. Unite of account is a function that gives a seller and buyer a way to measure unit of account. Labeling the prices on product this function also can be used to record debts. This enables the supplier and purchaser the price of the good in terms of money and value. Through innovations, credit cards cannot be used as substitute for money, but the card owners or company still requires money as payment for the service that people charge through the card. Store of exchange is money he or she has left over to purchase good or service that can be used in the future. Some product s or goods can be kept for a long period and the value increases, and soon can be converted into money (Heshmeyer, 2009, p. 15)).

How Central Bank Manages Nation's Monetary System

The Federal Bank has several tools used to control and manage the monetary policy. The Federal Reserve Bank is always evaluating the economic solidity and making obligatory changes to the monetary policy in an attempt to stabilize the economic health. The first tool used in the monetary system changes the interest rates on the money they loan to the banks. The higher the interest rate makes money more expensive and these changes the banks decision to loan money. . When the interest rates are lower, this causes the opposite effect. The next tool is that the Federal Banks has the power to change the guild lines of the reserves at any time. The reserve requirement is the percentage banks must keep in there vaults of their total loan portfolio. However, when the Federal Banks lower their requirement they can increase the amount of money they can loan to a company. The banks have the control over the money and this will have effect on the interest rate and inflation. The primary reason for creating Federal Reserve System is to help banks overcome the economy growth, and help with control of high interest rates and inflation (Mankiw, 2007, p. 13)).

Stated Direction of Recent Monetary Policy in the Unites States

The monetary policy mission statement is to ensure that there is enough money and credit available to business an as the economic growths without inflation. If there is, any signs of inflation the Fed need to work o a way to slow the economic growth down and money supply. This is here the tool discount rate requirements come into place open market operations. They begin monitoring the finical part of the banks problems. They also have a Federal Open Market Committee, and they discuss the economic concerns, and make any changes as soon as they are need. The Federal Reserve can then product more money and purchase bonds from the government. There will also come a time when there is two much money around, and then they will have to sell bonds to the bond market (Heshmeyer, 2009, p. 18).

One Policy Action the Federal