Federal Reserve Paper

The Federal Reserve Paper

Melissa Casazza

ECO/212 November 3, 2010

University of Phoenix

Purpose and Function of the Federal Reserve

The definition of money in economics is assets that are exchanged for payment of debits for services and goods that people except. Assets are known as anything that is of value that is owned by an individual (Hubbard & O’Brien 2010). People have used assets to repay debits for centuries. For example, poor people used to pay doctor visits with goods like chickens, jewelry, and other personal items instead of currency, because those individuals did not have anything else for payment of debit.

There are different functions of money: Medium of exchange, Unit of account, Store of value, and Standard of deferred payment.

• Medium of Exchange- when the seller accepts payment (cash) in exchange for goods and services, the payment (cash) serves as the medium exchange. The economy runs more effectively when the single payment (cash) is recognized as the medium exchange.

• Unit of Account- Unit of how the value of an item is compared to and accounted for. For example, the United States uses currency for money to purchase goods and services for a set price in terms of the currency exchange.

• Store of Value- Any type of financial asset that is held over for future use to purchase goods and services are known as a store of value. For example, keeping money in an interest bearing savings account, purchasing stocks and bonds are all forms of financial assets that can be exchanged for purchasing goods and services in the future.

• Standard of Deferred Payment- is the accepted way to settle a debt. For example, when buying a good or service without having the money up front, but promising to make good on that debt in 30 day is a standard of deferred payment (Hubbard &O’Brien 2010).

The Federal Reserve (Fed) was created in 1914 after banks were experiencing...