Federal Reserve

Federal Reserve Monetary Policy

Bonnie Reeves

University of Phoenix

Economic 212

Federal Reserve Monetary Policy

In society today things are needed for survival and advancement. Everyday things like food, shelter, medical care when received are exchanged in trade for money. The purpose and function of money is to buy these items and services to continue on in society. It is a way to exchange a means of living from customer to service worker. Money is also a way to measure someone’s wealth. It can be measured in many ways not just the actual bill itself but the things he owns or the business he runs and the placement of the economy that business is in. Money has three functions: medium of exchange, a unit of account and a store of value (Mankiw, 2007). Medium of exchange is what is used in the food, shelter and medical care and exchange for services and goods. A unit of account is the business man and his business of what he sales and what that is worth. Last a store of value is what a person would use to sell to one person but use that money of the sell to buy something else of need to him or that he might turn around and sell for more gain.

The central bank manages a nation’s monetary system and it main focus is to keep the strength of the national currency and money supply in good health. This is not the only thing it does it also controls subsidizes loan interest rates. There are three tools that the central banks use to control monetary policy are open market operation, reserve requirement and the discount rate. An open-market operation is where it buys or sells government bonds. When it buys bonds it increases the number of dollars available in the economy. As it sells bonds it does the opposite it decreases (Mankiw, 2007). Reserve requirement is a regulation on the smallest amount of reserve that banks have to hold for the deposits they have out. Last discount rate is when the bank allows banks to borrow from the...