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Monetary Policy

Essay by   •  March 14, 2012  •  Essay  •  408 Words (2 Pages)  •  1,681 Views

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What is money? "Money is assets that people are generally willing to accept in exchange for goods and services or for payment of debts. Asset is something of value owned by a person or company" (Economics, 2010). For example; if I owned a five karat ring and two thousand in cash and wanted to purchase a living room suit. I could use the ring (asset) and the cash (money) to get the living room suit.

Now what is the purpose of money? The purpose of money is to weight the value of goods. What are the functions of money? Money has four functions: medium of exchange, unit of account, store of value, and standard of deferred payment. Each function operates differently. "Medium of exchange is when sellers are willing to accept it in exchange for goods or services" (Economics, 2010). Unit of account is the single price of goods. All goods have one price at each individual seller. Store of value is when people save money. Standard of deferred payment is when a payment is postponed to a later date. As one can see each function operates differently to benefit each individual.

Explain how the central bank manages a nation's monetary system? The central bank manages the nation's monetary system in three different ways. The central bank is the Federal Reserve of the United States. The Federal Reserve manage the nation's monetary system by setting the Federal Funds Rates, adjusting reserve ratios, and buying and selling US securities. Federal Funds Rates are the rates the banks change borrowers on loans. Adjusting reserve ratio is the amount the banks have to maintain in the vaults to cover the loans that are lent out. Buying and selling US securities is the ability to increase or decrease the flow of money.

Outline the stated direction of recent monetary policy in the United States. "That development was bolstered by the release of the results of the Supervisory Capital Assessment

Program (SCAP), which were seen as helping clarify the financial conditions of the largest bank holding companies and provided investors with greater assurance about the health of the institutions", (Federal Reserve, 2010). This program helped out with inflation, unemployment and the real estate market. List at least one policy action that the Federal Reserve has taken to confirm that direction? The Federal open market committee target range for lower interest rate of zero to one fourth percent throughout 2009 into 2010.

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