Federal Reserve

Federal Reserve Paper

A main function of the Federal Reserve is to set monetary policy. The intention of the policies is to shorten the cycle of economic highs and lows and maintain a stable economy. Recent activity by the Fed demonstrates this regulatory function.

Purpose and function of money

Money is anything generally accepted as a means of exchange, a measure, or as a store of value. The economy cannot work efficiently unless money serves as a standard of value.

Four important functions of money are: to serve as a medium of exchange, a store of value, a standard of deferred payment, or as a liquid asset. Money passes from hand to hand in exchange for goods and services. Goods buy money and money buys goods. However, perishable goods cannot be stored for a long period. In this case, money has an advantage over goods, so money provides as easy means of storing wealth as compared to other goods. In the case of deferred payments, money enables exchange of present goods for future goods. Finally, money is a liquid asset because anything can be purchased with it, it can be saved for the future or it can be used as an investment.

Central bank manages a nation’s monetary system

The central banking system in the United States is the Federal Reserve System (commonly known as "the Fed"). The Fed regulates financial institutions, acts as the United States government's bank, acts as a bank's bank, and is responsible for managing the nation's money. This system, made up of 12 regional Federal Reserve Banks in major cities throughout the country, is made up of two divisions. The 12 regional Reserve Banks act as the service division that carries out the policy and oversees financial institutions. The other division is the Board of Governors and they are responsible for setting monetary policy and managing the nation’s money (How the Fed works, 2008).

In its’ role as money manager, the Fed has two primary goals as a...