Federal reserve monetary policy Term Paper Example | Topics and Well Written Essays - 750 words

Federal restrain fiscal policy - Term Paper Example gold is a medium by dint of which exchange takes place. Encyclopedia of Britannica defines function of capital as a facilitator of the movement between buyer and seller however, money can be defined mainly in monetary value of three functions as a medium of exchange, as a unit of account and as a store of value. (Functions of Money) If money had not been there all transactions would have to be done through barter system. That is a tedious process on day to day operations. Money too functions as a unit of account measuring the value of goods or services under exchange. Money holds round value at given time so it is a storehouse of value. It is not a scoop up storehouse as it tends to depreciate overtime, if seen in the context of other assets such as land, gold, and silver. It is most liquefied of all assets and its store value helps make us transaction. (Functions of Money) Central Bank Manages a Nations Monetary System The broad economic goals of monetary policy are full employment, sustainable economic growth, and minimum inflation. The Federal Reserve achieves these goals by regulating and controlling the growth of money and availability of assurance. It achieves its goals each by open mart operations, altering alter rate or reserve ratio. (The Fed Today) A) blossom Market Operations The Feds tool for mitigating the effect of inflation and break is through open market operations. The central bank sells and buys U.S. government securities in the open market thus, influencing short-term interest rates and the growth of credit and money. When not enough money is available in the financial system causing economic backwardness called recession, the central bank buys securities. The funds used by the Fed in purchasing the securities leave last arrive at local banks, which then will have much money to lend. This way more money will come into the financial system and create stabilizing effect s. On the contrary, when the Fed realizes market is hot and too much money is in circulation or credit are available in the market causing inflation, the Fed will interfere and sell securities of banks. Thus extra money will be squeezed out of the system, reducing inflationary pressures and stabilizing the economy. (The Fed Today) Thus, final goal of monetary policy is a stable economy providing full employment and production, stable prices and steady growth. B) The throw out Rate The Discount rate is the intervening tool at the disposal with the Fed. It is the interest rate financial institutions charged by the Fed for short-term loans. Altering discount rate can discourage and encourage banks investment and lending activities signaling central banks goals and influencing the interest rates that banks offer loans at and pay to depositors. (The Fed Today) C) The Reserve essential The fed makes it mandatory to keep certain percentage of checking account deposits as reserve. Simply raising the reserve requirement banks will have less money to lend thus, restricting the money supply. Opposite is also true reducing the reserve ratio, banks will have more free money to lend and thus, money supply will increase. This tool is rarely used. Reserve requirement changes are indication that monetary policy is now moving toward a new direction. (The Fed Today) Stated Direction of Monetary Policy Since the 2001 recession and with the rising unemployment rate until mid-2003, the Fed reached to low interest rates of 1% by mid-2003. With the expansion and rising prices, the fed revised its target upward to reach 5.25% by mid-2006. With the economy entering into recession by December 2007, the target interest rates moved downward to 0 and 0.25 percent during December 2008. (Labonte, 2010) What came into bring out of the monetary authorities that liquidity was not reaching to the financial system. Traditional transmission mechanism of monetary policy was not functioning. On this, the fed started making loans to non-financial firm and other financial institu