Federal_Reserve

Federal Reserve Paper This paper will contain in particularize the purpose and function of money, how the central bank manages the monetary policy, the direction of the current monetary policy, what action the Federal Reserve has taken to head in the certain direction, and the effects of monetary policies on the economy’s production and employment. Money is a commodity that is utilized around the world. It is used to purchase goods and services such as a house, food and purchase medication among other products. Principally, money operates as a medium of exchange. Money was established and developed in order to make possible the purchasing and selling of both products and services. In today’s society, money has additionally become a standard measure pertaining to the worth of wealth for both private individuals and businesses (Data Limitations and the Fragmented U.S. Financial Regulatory Structure Challenge Federal Oversight and Enforcement Efforts, 2009). The Central Bank, which additionally comprises the Federal Reserve, is in charge of handling, organizing, and managing the monetary within the United States through the utilization of numerous methodologies and tools. Firstly, the Federal Reserve’s fund interest rate radically affects the grand total amount of existing and accessible money within the system. As a general rule, if the interest rate is high, the amount of money that is accessible is typically low. When it comes to the higher reserve requirement, there is a requisite for financial institutions to deposit with the Federal Reserve, which in turn, additionally affects the amount of money which is accessible for lending purposes, as this typically lowers that amount (Mark, 2009). When it comes to an open market operation, the Federal Reserve has the ability to both purchase and sell Unites States Treasury within the market in order to calculatedly affect the amount of money which is accessible in the system. The purpose and intentions of the monetary policy within the United States are comprised within the Federal Reserve Act which was established by the Federal Reserve. Basically, it aims to effectively support and sponsor the objectives of maintaining elevated employment rates, unwavering prices, in addition to restrained long-term interest rates. As a consequence of the existing economic predicament, the Federal Reserve has opted to implement an expansionary monetary policy (Tulip, 2009). Basically, such an expansionary monetary policy entails that the Federal Funds interest rate will be reduced In order to expose the effects of monetary policies on the economy’s production and employment, it would be fitting to use the example of the current credit crisis in which the United States is suffering. In order to overcome the current state of the economy and liberate the country of the recession, the Federal Reserve has implemented various monetary policies. These monetary policies include the Federal Reserve reducing interest rates in an attempt to get the economy back on its feet. The Federal Reserve’s action of reducing the short-term interest rates seeks to increase the market’s overall supply of money and at the same time, stimulate and encourage financial institutions to start lending to businesses again (Tulip, 2009). The Federal Reserve maintains that this will surely permit the economy’s recovery to occur as quickly as possible. As such, the levels of housing, consumer spending, and investments by businesses have recently all been rising; however, they are still unstable. The unemployment rate, nonetheless, is still on the rise. It is expected that these rates will soon rise, and the gross domestic product (GDP) will increase as well. The recent progression of the economy will most-likely warrant the implementation of a monetary policy that will be the very opposite, as soon as the levels and rates become stable again; it will tighten the supply of money by increasing the Federal Funds interest rates (Mark, 2009). By increasing the Federal Funds interest rate, the Federal Reserve would be attempting to reduce the speed in which the economy is growing in order to create and maintain a more stable economy. All in all, when evaluating the Federal Reserve’s actions and inactions over the years, especially in present times, it is apparent that the monetary policies in which the Federal Reserve has implemented drastically affects the production and employments levels within the United States’ economy. An expansionary monetary policy is accomplished when the Federal Reserve reduces the funds rate, and when that occurs, it encourages consumer spending and investment, which in effect, enhances production levels which results in a reduction of the rate of unemployment. On the other hand, a tight monetary policy accomplishes the converse actions.