Federal Reserve Paper Principals of Economics

Federal Reserve Paper

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ECO212 Principles of Economics

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Federal Reserve Paper

There is an adage that states “money makes the world go round.” Consumers, businesses, and governments all have their eye set on how much money they can obtain, but as an economist the questions are what is the purpose of money and what kind of function does money have in an economy. Of course, someone has to manage all the money floating around the nation but what is this FED and what does it have to do with how much money is available at a given time and the monetary policies of the economy? Once this is understood, taking a look at the current policies should help in understanding how changes in these policies affect the current economy and employment rates.

The Purpose and Function of Money

According to Manikaw (2007) the definition of money is “the set of assets in an economy that people regularly use to buy goods and services from other people” (p. 642). In today’s civilized economy money takes the form of paper or metallic coin currency, but money can be any form that the society’s government or leaders consider to be of value to trade for goods or services. An example of this can be seen in the early history of the United States when pilgrims and the native Indians traded beads and rugs for food and other items deemed as relevant. This trade also shows the first function of money; a medium of exchange. Much like how current consumers purchase a gallon of milk with paper currency, the beads and rugs were exchanged to provide food and other goods.

The second function of money is as a unit of account, “the yardstick people use to post prices and record debts” (Manikaw, 2007, p. 643). In the United States, the dollar is the unit of account for money such that the cost of milk could be $3 or the price of a pair of shoes could be $150. Without this unit of account, the price of milk would be stated as 1/50 the price of shoes or the shoes would be 50...