Money is a medium through which exchange takes place. Encyclopedia of Britannica defines function of money as a facilitator of the transaction between buyer and seller; however, money can be defined mainly in terms of three functions; as a medium of exchange, as a unit of account and as a store of value…
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Money is a medium through which exchange takes place. Encyclopedia of Britannica defines function of money as a facilitator of the transaction between buyer and seller; however, money can be defined mainly in terms of three functions; as a medium of exchange, as a unit of account and as a store of value. (Functions of Money) If money had not been there all transactions would have to be done through barter system. That is a tedious process on day to day operations. Money also functions as a unit of account measuring the value of goods or services under exchange. Money holds some value at given time so it is a storehouse of value. It is not a best storehouse as it tends to depreciate overtime, if seen in the context of other assets such as land, gold, and silver. It is most liquid of all assets and its store value helps make us transaction. (Functions of Money) Central Bank Manages a Nation’s Monetary System The broad economic goals of monetary policy are full employment, sustainable economic growth, and minimum inflation. The Federal Reserve achieves these goals by regulating and controlling the growth of money and availability of credit. It achieves its goals either by open market operations, altering lending rate or reserve ratio. (The Fed Today) A) Open Market Operations The Fed's tool for mitigating the effect of inflation and recession is through open market operations. The central bank sells and buys U.S. government securities in the open market; thus, influencing short-term interest rates and the growth of credit and money. When not enough money is available in the financial system causing economic slowdown called recession, the central bank buys securities. The funds used by the Fed in purchasing the securities will eventually arrive at local banks, which then will have more money to lend. This way more money will come into the financial system and create stabilizing effects. On the contrary, when the Fed realizes market is hot and too much money is in circulation or credit are available in the market causing inflation, the Fed will interfere and sell securities of banks. Thus extra money will be squeezed out of the system, reducing inflationary pressures and stabilizing the economy. (The Fed Today) Thus, final goal of monetary policy is a stable economy providing full employment and production, stable prices and steady growth. B) The Discount Rate The Discount rate is the intervening tool at the disposal with the Fed. It is the interest rate financial institutions charged by the Fed for short-term loans. Altering discount rate can discourage and encourage bank's investment and lending activities signaling central bank's goals and influencing the interest rates that banks offer loans at and pay to depositors. (The Fed Today) C) The Reserve Requirement The fed makes it mandatory to keep certain percentage of checking account deposits as reserve. Simply raising the reserve requirement banks will have less money to lend thus, restricting the money supply. Opposite is also true; reducing the reserve ratio, banks will have more free money to lend and thus, money supply will increase. This tool is rarely used. Reserve requirement changes are indication that monetary policy is now moving toward a new direction. (The Fed Today) Stated Direction of Monetary Policy Since the 2001 recession and with the rising unemployment rate until mid-2003, the Fed reached to low interest rates of 1% by mid-2003. With the expansion and rising prices, the fed revised its target upward to reach 5.25% by mid-2006. With the economy entering into recession by December 2007, the target interest rates moved downward to 0 and 0.25 percent during December 2008. (Labonte, 2010) What came into notice of the monetary authorities that liquidity was not reaching to the financial system. Traditional transmission mechanism of monetary policy was not functioning. On this, the fed started making loans to non-financial firm and other financial institu
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“Federal Reserve Monetary Policy Term Paper Example | Topics and Well Written Essays - 750 Words”, n.d. https://studentshare.org/macro-microeconomics/1422417-federal-reserve-monetary-policy.
The persistent decline in the economic activity therefore attracted the attention of the Government as well as the Federal Reserve System. Government took both the fiscal as well as monetary measures in order to stimulate the economy. These events however, led Federal Reserve System or FED to intervene into the economy in order to take some measures to correct the economic situation.
The role of a central bank in any economy is to manage the monetary policy of the country while ensuring that it manages to achieve broader macroeconomic objectives. One of the key objectives of any central bank is therefore to ensure that inflation within economy remains under control.
The Federal Reserve is the fundamental bank of America initiated in 1913 through the ratification of Federal Reserve Act as a reaction to the financial apprehensions of 1907 (Greider 67). However, the functions of the Federal Reserve have widened over time as the bank develops to meet the tests of organization in the economy.
The shareholders of federal reserves are private banks (Solomon 1996). Almost all shareholders are private banks, and government owns none of their stock. When the government money gets limited, the treasury issues bonds to the dealers, which auction them off (Solomon 1996).
262, Review of Economic Dynamics). That may be right, but a bigger account is that the budgetary action fabricated in the US affairs for added nations abundant added than their action affairs for the US. Being the better abridgement and the key bill country, the US dollar is the de facto numeral for a lot of affairs involving barter with the US and a cogent allotment of barter amid added countries.
There is a certain contrast between how the system ought to work (or is expected to work) and how it actually works (with its actual effects on banking systems) in reality. Because the Federal Reserve (which, from here on, shall be referred to as
ample is its mode of activities in the face of the recent global meltdown that not only helped in controlling the crisis but included measures to effectively control any aftermath. The present paper deals with the institution’s monetary policies which from time to time had
?s three key functions are providing and maintaining an efficient and effective payment system, supervising and regulating banking operations throughout the country and developing the country’s monetary policy (Federal Reserve Bank of Dallas, n.d.). This paper will focus on
The Federal Reserve defines Monetary Policy as the actions it undertakes to influence the availability and cost of money and credit to help promote its congressionally mandated goals, achieving a stable price level and maximum sustainable economic growth. The Federal Reserve has had three means to achieve this objective.
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