The Purpose and Function of Money
Many transactions use money because it is the most acknowledged medium of exchange. The purposes incorporate a store of value and universal acceptability. Paying money enables people and institutions to acquire goods and services. It is notable that money facilitates exchange-trading activities (McEachern, 2009). It is also noteworthy that money plays a significant role in measuring value. This makes it possible for people to use it in deciding the rate of exchange on diverse purchases. The fact that money is acknowledged universally enables it to function as a store of value.
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It is non – perishable, thus making it store the value of any property (McEachern, 2009). Money also functions as a standard for future payments. This enables people to undertake future transactions based on the value money holds. The transfer of value of the property and other assets also takes place based on money. This makes it possible for individuals and institutions to transfer property from one person or institution to another and vice versa (McEachern, 2009).
How the Central Bank Manages a Nation’s Monetary System
The central bank plays a critical role in managing a country’s monetary system. The bank implements the chosen monetary laws and regulations in every nation. For example, the Federal Reserve is charged with the responsibility of implementing the chosen policy associated with monetary systems (McEachern, 2009). The Fed alters the interest rates charged on money given to financial institutions. It is notable that higher rates make money exorbitant. Lending institutions shy away from borrowing money from the central bank (McEachern, 2009). Conversely, setting lower interest rates on money the Fed lends to financial institutions creates a good business opportunity for banks. The banks rush to the Fed to borrow money for business activities such as loaning (McEachern, 2009). The central banks also determine reserve requirements. This entails the maximum value of money that financial institutions can keep based on their loans.
Stated Direction of Recent Monetary Policy
The recent monetary policy was prepared based on how the economy expanded in the year 2012. The Federal Open Market Committee (FOMC) noted that the rate of joblessness remained high, and other people engaged in part-time work (Board of Governors of the Federal Reserve System, 2013). The committee noted that keeping suitable monetary accommodation would promote the economic escalation towards maximum job availability and price constancy. The FOMC offered more monetary accommodation as a way of promoting its goals.
The committee strengthened its forward control of federal funds and sanctioning more asset purchases (Board of Governors of the Federal Reserve System, 2013). FOMC pronounced that it would carry on its program to lengthen the average development of its treasury assets. Furthermore, it would start buying more agencies assured mortgage-backed securities. The committee planned to buy more assets as well as use other policy tools in a suitable manner. This would continue until the period when the position of the labor market is attaining price stability sustainability (Board of Governors of the Federal Reserve System, 2013).
Policy Action that the Federal Reserve Has Taken to Confirm that Direction
The Fed implemented the FOMC recommendations initiating a policy for the acquisition of assets. The Fed assets escalated to $3,097 billion. This was as of 20 February 2013. The purchasing policy enabled the asset holdings escalation (Board of Governors of the Federal Reserve System, 2013). Furthermore, it reflects the expansion of the Fed’s value of Treasury securities as well as organizational mortgage-backed securities. The expansion also originated from other previous decisions, which quickly escalated average maturity. These activities have enabled inflation to stabilize (Board of Governors of the Federal Reserve System, 2013). It has also enabled monetary accommodation, thus escalating the opportunities associated with employment and consumer prices in the country.
The Effects of Monetary Policies on the Economy’s Production and Employment
Monetary policies have multifaceted effects on the economy. Particularly, monetary policies have a direct impact on the ability of the economy to produce and provide job opportunities (Federal Reserve, 2011). The Fed’s role in implementing monetary policies associated with interest control affects the demand for market exchange. The effect of monetary policies on production and employment takes place as a process. The process originates from the fact that monetary policies alter interest rates (Federal Reserve, 2011). Consequently, interest rates also affect the demand for market exchange activities. This eventually affects output and job opportunities.
It is noteworthy that loose monetary policies minimize interest rates. This encourages lending institutions to obtain money from the Fed, thus enabling more money to exist within the economy. Therefore, more investors will initiate production activities aimed at manufacturing goods (Federal Reserve, 2011). High investment rates escalate employment opportunities. Furthermore, tight monetary policies reflect high-interest values set by the Fed. This presents a challenging moment in the marketplace for more people, and institutions will shy away from taking loans (Federal Reserve, 2011).
It is notable that this leads to a low circulation of money within the market. This affects market expansion through investment and the creation of companies. There will be a minimal expansion in the marketplace (Federal Reserve, 2011). Production will reduce drastically, thus negatively affecting the economy. The situations also hinder job creation.
Board of Governors of the Federal Reserve System. (2013).Monetary Policy report. Web.
Federal Reserve. (2011). How does monetary policy influence inflation and employment? Web.
McEachern, W. A. (2009). Economics: A contemporary introduction. Mason, OH: South-Western Cengage Learning.