Federal Reserve Paper

Federal Reserve Paper

Myra D. Coleman

ECO/212

R. Mupier, Facilitator

June 7, 2010

Federal Reserve Paper

The role of the government in the U.S. economy extends far beyond its activities as a regulator for this country. It manages the overall pace of the economic system, known as the fiscal policy and monetary policy. This analysis will look closely at the monetary policy, known as the Federal Reserve System. First, one will define the purpose and function of money in the U.S. economy. Explain how the Federal Reserve System manages a nation’s monetary system. Identify one policy action the Federal Reserve System has taken to lead the U.S. in the direction of its current monetary policy. And lastly, one will explain how monetary policies affect the U.S. economy’s production and employment.

Before looking at the heart of the Federal Reserve System, one will first define the purpose and existence for money. It is a set of assets where people use it to buy goods and services from other people on a regular basis (Mankiw, 2007). Money has three main functions: a medium of exchange, unit of account, and a store of value. As a medium of exchange, it is an item that buyers give to sellers when one purchase goods and services (Mankiw, 2007). The second main function of money, a unit of account, is a measuring tool people use to post prices and record debts (Mankiw, 2007). And thirdly, it is a store of value. It is where a seller accepts money today, in exchange for a good, and then the seller holds the money and becomes a buyer of another good and service at another time (Mankiw, 2007). To ensure the U.S. government maintains a balance for the existence of money and the monetary system, it created the Federal Reserve System.

The Federal Reserve System was created by Congress in 1913 and consists of a Board of Governors (located in Washington, D.C.) and twelve regional Federal Reserve Banks. They both share the responsibility for supervising and regulating...