Federal Reserve Paper Corrin Watson ECO/212 July 3, 2010 Mohamed BenSenia Federal Reserve Paper Money is controlled by the central bank, and they determine the value of the US dollar. Money is defined as the assets that people are generally willing to accept in the exchange of goods and services or for payment of debts (Hubbard & O’Brien, 2010). The nation’s central bank is called the Federal Reserve Bank, and different tools are used to control and manage the monetary policy. For this is the responsibility of the Federal Reserve Bank.
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. Money was generally created to replace the barter system and is used habitually in the world’s economy in exchange of goods and services. Money is used to perform four functions that are medium of exchange, unit of account, store of value, and standard of deferred payment.
Medium of exchange is activated when sellers are willing to accept items in exchange of goods or services. The economy is more resourceful when one item serves as medium of exchange, such as the US dollar.
Unit of account is normally used in the barter system, where each good has different prices. Once a single good is used as money, each good has one price as opposed to different prices. Unit of account gives buyers and sellers a way of measuring value in terms of money. Store of value is when money allows value to be simply stored. Conversely, it is not the only store of value. Any asset embodies store of value and value is not solidified and may increase in the future. Standard of deferred payment consists of money facilitating exchange at a given moment by providing medium of exchange and unit of account.
Furthermore, it can facilitate exchange over time by providing store of value and standard of deferred payment. Money is a considerably large variable in the monetary system. The Federal Reserve Bank (Fed) controls and manages the nation’s monetary system. Fed uses three monetary policy tools to assist in management of the money supply which are open market operations, discount policy, and reserve requirements. These three tools are intended to aid in the control of supply and demand of, and change the volume of checking account deposits.
The Federal Reserve has been concerned with the stability of the nation’s current monetary policies and its effects. In the most recent Monetary Policy Report to the Congress, this particular issue was addressed. Their efforts are working toward strengthening the financial system and its oversight so as to minimize the risk of replay of the recent financial crisis (Bernanke, 2010). Should the crisis reoccur, plans to limit economic costs are also discussed. The Fed supports the functioning of financial markets and promotes recovery in economic activity using a wide array of tools.
The Federal Open Market Committee (FOMC) maintained a target range of 0 to 1/4 percent for the federal funds rate throughout the second half of 2009 and early 2010 and indicated that economic conditions were likely to warrant exceptionally low levels of the federal funds rate for an extended period. Further, the Federal Reserve continued its purchases of Treasury securities, agency mortgage-backed securities (MBS), and agency debt in order to provide support to mortgage and housing markets and to improve overall conditions in private credit markets (para. 9).
The Federal Reserve is encouraging a smooth conversion in financial markets as the acquisitions are fulfilled. They are increasing the interest rates paid on reserves and putting pressure on the short-term interest rates, and in the meantime, they will not provide short-term funds less than what they can produce so the funds will be left at Federal Reserve Banks on deposit. The option to redeem or sell securities is made available in order display monetary limitations. The reduction of securities holdings would minimize the amount of reserves remaining in the banking system as well as minimize the size of the Fed balance sheet.
Currently, the Federal Reserve does not expect to sell any securities holdings in the future. It is predicted that the labor market conditions will recover over the next couple of years. The Federal Reserve maneuvers the monetary supply into the economy; interest rates, inflation, and level of unemployment become modified. The government uses taxes and interest rates to keep the economy organized. Raising taxes leads to higher unemployment, less efficiency economy, and a reduced production rate by different industries. When interest rates are rapidly raised, acquiring credit becomes more difficult, the cash flow weakens, roduction decreases, and unemployment increases. However, when interest rates are lower, the cash flow increases, banks are more willing to lend money, production increases, and the employment rate rises. Money is purposeful in the exchange of goods and services within the economy. The monetary policy is a gateway for the public to see how the Federal Reserve Bank manages and controls the nation’s monetary system. By reviewing and making necessary changes to the monetary policy on a consistent basis, the Federal Reserve Bank can stabilize the finances and promote economic expansion.
The Federal Reserve is currently acting on the reconstruction of the improvement of current economic conditions. References Bernanke, B. S. (June 16, 2010). The Squam Lake Report: Fixing the Financial System. Retrieved from http://www. federalreserve. gov/newsevents/speech/bernanke20100616a. htm Hubbard, R. , & O’Brien, A. (2010). Economics (3rd ed. ). Boston, MA: Pearson Hall. www. federalreserve. gov. (February 24, 2010). Monetary Policy Report to the Congress. Retrieved from http://www. federalresserve. gov/monetarypolicy/mpr_20100224_part1. htm
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