Federal_Reserve

Federal Reserve Paper ECO/212 March 22, 2010 Eric Kuns Money is generally defined in terms of three distinct functions or services that it provides an economy. It functions in the economy as a store of value, meaning money must hold its value over time, through a medium or means to exchange goods between members of society, and a unit of account, meaning it provides a common measure of the value of the goods exchanged. The main purpose of money and the reason money was invented was to ease or facilitate the above mentioned exchange of goods between members of society. The ultimate purpose of the invention of money was to make life better, so to speak. If life is not made better by money then it is not properly used. The function of money itself ultimately relies on a little faith in its actual value. The central bank of the United States is the Federal Reserve System (Fed). The board governors of this private organization regulate, manage, and implement policy regarding the money supply in the United States. When the Fed implements monetary policy, they are in effect managing the flow of cash and credit in the U.S. As the Fed is the government’s bank it keeps the wheels of business moving by providing payment services, currency, coin, eft’s (electronic funds transfer), and even check-clearing services. The Fed also administers finance-related consumer protection laws. Monetary policy is implemented through research of macroeconomic variables like inflation, employment, and output. But monetary policy involving these variables is indirect, The direct and most immediate effects of monetary policy are on the real interest rates, the nominal interest rate seen in the financials of a newspaper minus the expected rate of inflation. The monetary policies that raise and lower interest rates directly affect society’s and company’s demand for goods and services. As monetary policies affect the interest rates, the real interest rates, in turn, affect demand, and ultimately inflation, employment, and output or production. If the Fed lowers interest rates, more money is circulated or available in the economy, greater expansion or output of production occurs, and employment rates are increased substantially. If the Fed raises interest rates the result is the exact opposite of lowering the interest rate, less money is circulated or available in the economy, less expansion, output or production, and employment rates are decreased. References Federal Reserve System. (2010). Board of governors of the Federal Reserve System. Retrieved from http://www.federalreserve.gov/monetarypolicy/default.htm