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Federal Reserve Paper

828 words - 3 pages

Federal Reserve PaperUniversity of PhoenixFederal Reserve PaperIntroductionThis paper will give definition to the purpose and function of money. It will explain how the Federal Reserve manages the monetary system of the United States. This paper will also outline the stated direction of recent monetary policy in this nation. It will list at least one policy action taken by the Federal Reserve confirming that direction. And, this paper will give explanation to the effects of monetary policies on production and employment within the economy.a. Define the purpose and function of money.In defining the purpose of money, one must simply define its functions. There are three functions of money. First of all, money is a medium of exchange. It is also a unit of account, and a store of value. "A medium of exchange is an item that buyers give to sellers when they purchase goods and services." (Mankiw, 2007, p. 643) For example, when a person goes to Joe's Diner for a hamburger and shake, he pays Joe with money for the meal he just ate. Money as a unit of account is a measurement used to understand the value of a good or service or a debt. For instance, if a Pepsi costs $1 and a television costs $200, the TV may be worth 200 Pepsis, but it is measured in dollars. Money as "a store of value is an item that people can use to transfer purchasing power from the present to the future." (Mankiw, p. 643) When a person buys gasoline today, the store owner can hold that money to purchase a new putter next week.b. Explain how the central bank manages a nation's monetary system.The Federal Reserve is the central bank of the United States. It was created in 1913 to supervise the nation's banks and to regulate the money supply of the nation. The Fed manages the nation's monetary system with the "three tools in its monetary toolbox: open-markets operations, reserve requirements, and the discount rate." (Mankiw, 2007, p. 653) In open-market operations, the Fed buys or sells government bonds to either increase or decrease the money supply. When it buys government bonds, the money supply increases and is circulate within the economy. When the Fed sells these bonds, it decreases the money supply. Reserve requirements are used by the Fed to regulate the amount that banks can lend. If it raises the reserve rate, banks must hold more money in reserve. As a result, less money can be loaned out, which means less money...

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