Eco212_U.S._Federal_Reserve_Monetary_Policy

U.S. Federal Reserve Monetary Policy Terra Roberts ECO212 March 27, 2010 Stephen Keels U.S. Federal Reserve Monetary Policy Money is the main source used for trading for goods and services in the nation one lives in. I want to discuss how money is used and what it does to help the economy. I want to explain how the central bank manages our nation’s monetary system, and what the most recent report from The Federal Reserve is as well as the expected outcome from the latest observation. Finally, I want to explain how the monetary policies are affecting the economy today in production and employment levels. APA format doe not allow the use of “I”. Purpose and function of money Money is the set of assets in the economy that people regularly use to buy goods and services from other people (Mankiw, 2007, p 642 para-5). Money is an easy way to trade if one wants to purchase a good and not exchange a good or service for the product desired. It is the use a piece of currency or money in exchange for the good or service. Money is necessary for our economy to function. According to Mankiw, the three functions of money are money a medium of exchange, a unit of account, and a store value. A medium of exchange occurs when the consumer gives the producer money to receive there good or service. A unit of account occurs when a record is used to keep accountability for one’s money. A store value occurs when a producer of a good or services holds money from which a consumer gave him or her for there good or service to at a later time to use for a medium of exchange for him or herself on a good or service. This is a good discussion of the functions of money. Central Bank manages nation’s monetary system The Federal Reserve is the central bank system of the United States. It is “an institution designed to oversee the banking system and regulate the quantity of money in the economy” (Mankiw, 2007, p 648 para-2). Our nation needs a money manager because let us face it money cannot take care of itself. Someone has to watch over it. Money is the support of our economy. Without money there would be no job creation and no business development. The Federal Reserve also called The Fed implements monetary policies to control the flow of money in the economy. For example, if money expands too rapid then a person, firm, company or country cannot produce an adequate amount of goods or services to keep up with spending, then prices will increase and this can cause inflation within our economy. On the other hand, if the flow of money contracts too rapid then spending and businesses activity may decrease, which can cause people to lose their employment and this can cause a recession. “The Fed conducts monetary policy to attempt to balance these two extremes to keep prices steady, workers employed, and factories productive” (Federal Reserve Bank of San Francisco, 2010). I agree with this. Outline recent monetary policy In the most recent press release from The Federal Reserve, it seems to be that our economy is slowly regaining strength and that the labor market is stabilizing. Presently, there are signs that consumers are spending more but are also holding back because of high unemployment rates, lack of income growth within a household, and creditors are still being firm with credit. The committee is anticipating that it will take some time but will recover over a long period. According to the press release on March 16, 2010 “With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time” (Board of Governors of the Federal Reserve System, 2010). The committee will continue to look at the economic growth and put policies into place as they are considered necessary to encourage economic stability and price stabilization. Good paragraph. Current Policy and the Feds action To improve the housing market, the Fed put a policy into place to help support mortgage lending to help improve the credit markets as well. “The Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt” (Board of Governors of the Federal Reserve System, 2010). This policy is near the set goal and is projected to be completed by the end of March. This is allowing people who own homes and are near the risk of losing there home to refinance or negotiate another way with there creditor to pay there mortgage note so they don’t lose there home. Nice, efficient paragraph. Effects on production and employment By the Fed putting policies in place such as the increasing and decreasing interest rates it affect’s how consumers have a demand for goods or services. “Mainly by altering borrowing costs, the availability of bank loans, the wealth of households, and foreign exchange rates” (Federal Reserve Bank of San Francisco, 2010). If there is a decrease in interest rates, then the consumer will have a lower cost for borrowing credit, which can lead to increase in spending. If there is an increase in demand, then a person, firm, company or country has to find a way to increase there (wrong word)supply or production to keep up with the demand for the good or service desired by the consumer. This also allows employment rates to increase bringing down unemployment rates within all the nations. Conclusion Based on all the information I was able to review from The Federal Reserve, by allowing the committee in a position to review how our economic stability is doing and allowing them to place monetary policies it is beneficial to all nations worldwide. As long as the economy can stay on the path The Federal Reserve has laid-out then there will be continued growth, and the recession may come to an end. One can hope that in the next few years to see our economic growth and stability continue to remain stable. It should be mentioned that the Fed has kept interest rates extremely low in order to stimulate aggregate demand and help put the country out of this recession. Reference: Federal Reserve Bank of San Francisco (2010). About the Fed. Retrieved online from: http://www.frbsf.org/publications/federalreserve/fedinbrief/central.html Mankiw, N. G. (2007). Principles of economics (4th ed.). Mason, OH: Cengage Learning. Retrieved from: https://ecampus.phoenix.edu/content/eBookLibrary2/content/TOC.aspx'assetdataid=5b076d5c-d87a-4356-a41b-fc21be50d15b&assetmetaid=386f9b7c-ca43-4f9b-ac98-947ccb39d770’ Board of Governors of the Federal Reserve System, March 16, 2010. Press Release, Retrieved online from: http://www.federalreserve.gov/newsevents/press/monetary/20100316a.htm This paper has some positive points. The recent history of the Federal Reserve is discussed in detail and the purposes of money are adequately discussed. There is a minor APA format violation in the introduction. The paper earned 5.5 points for content, 1.5 for development, and 1.8 for mechanic for a total of 8.8.