The Federal Reserve

Running head: THE FEDERAL RESERVE

The Federal Reserve

Thomas Wolfe

University of Phoenix

Principles of Economics

ECO/212

Renee Tan

August 09, 2009

The Federal Reserve

The Federal Reserve is an agency that that regulates and controls the flow of money into a given economy. They are operated by 7 members that make up the board of Governors to include a Chairman and they are all appointed by the President of the United States and approved by the Senate. There are five areas that will be explained to help understand the Federal Reserve better. They are the functions and purpose of money, how the central bank actually manages the nation’s monetary system, outline the direction of our current monetary policy in the US, explain one policy that Federal Reserve has taken to validate the stated direction and then explain the effects that monetary policy has on production and employment.

The purpose of money is to give an economy a way to purchase goods and services from each other. There are three functions of money. The first function is a medium of exchange which is the physical piece of money that is exchanged between buyers and sellers for goods and services. The second function is a unit of account which is the method in which sellers post their detailed prices as well as their debts. The third function is a store of value. This function allows someone to take the payment for a good or service and hold onto it to use later in the future.

The Central Bank plays a very important role in the availability of money in our economy. The basic system that banks use is called fractional reserve banking. This is a simple concept, the banks keep only a fraction in the bank as reserves and lend out the rest with interest rates to create revenue for banks. There are times when this system fails and banks must look to the Fed for help. There are three major tools that are used to control how much money is available in the economy. The three tools are Open Market...