Eco212

Effects of Monetary Policies on the Economy’s Production and Unemployment

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Effects of Monetary Policy on the Economy’s Production and Employment

The purpose and function of money is to purchase goods and services, and for the settling of public and private debts. Money, according to Dictionary.com (2010), is defined as “the official currency, in the form of banknotes, coins, etc, issued by a government or other authority.” The United States and most other countries operate on a system that utilizes paper money, also known as “fiat money.” Fiat money, according to Investopedia, (2010), is defined as “Currency that a government has declared to be legal tender, despite the fact that it has no intrinsic value and is not backed by reserves.”

The Federal Reserve System

The Federal Reserve operates as the central bank of the United States of America. The Federal Reserve is responsible for the management of the supply of money and credit for the United States. The Federal Reserve is considered to be the center of the United States financial system. The Federal Reserve also serves as the banker for the Federal government by handling financial service duties for the United States Treasury Department. In addition, the Federal Reserve is also the body that is charged with the task of administering consumer protection laws where banking and finance is concerned.

The United States central bank system consists of 12 Federal Reserve districts. Each district has a Reserve bank located in the principal commercial city within that district. While all national banks are required to join the system, state banks can join if they meet membership requirements. The Federal Reserve Act of 1913 set fixed reserve requirements for the United States’ fractional reserve banking system. This allows each district bank to set its own rates for the funds loaned to member banks within their...