September 29, 2010
In 1913 under the Federal Reserve Act, the central bank of America was formed and came to be known as the Federal Reserve. The central bank was put in place to limit the financial panic associated with the economy as well as to help prevent bank runs. Though over time there functionality has changed and expanded greatly, their importance to America’s economical well being has not (Hubbard & O’Brien, 2010).
The focus of this paper will look to define the purpose and function of money and give an explanation regarding how the central bank manages the nation’s monetary system. The paper will also focus on the recent monetary policy of the United States and different actions that have been taken by the Federal Reserve to ensure their enactment. Last, the paper will explain the effect the monetary policies have on the economy’s production and employment.
A simple definition for money would be anything that could be used for payment of goods and services. The definition give by most economists is, “A medium of exchange that is widely accepted in payment for goods and services and in settlement of debts.” Money however began as what is called commodity money, which could be anything with value such as trading a goat for cheese. This, however, was also considered bartering in earlier days. Today citizens use what is called “fiat” money, which is money that has no worth but has been given its value from the government declaring it to be legal tender. Money’s purpose and true function is to provide individuals globally with a way to simply buy and trade commodities (n.a., 2009).
In America the Federal Reserve or the central bank manage the nation’s monetary system. The central bank can manage and control through different monetary policies put in place to help prevent issues such as over inflation, recession, and ultimately depressions. This is done through the maximization of...