The example of the great depression during the thirties is a great example of how governments most make the best decisions when it comes to the economy. Conditions can change drastically and therefore lead to a recession with low employment rates or an increase in inflation. With the use of the Federal Reserve, changes within the economy can be seen faster than fiscal policies can. The role of the Federal Reserved is to monitor the supply of money within the economy. The tools available to the Federal Reserve are what steers the economy in the direction preferred. Within this paper I will identify how money is created to circulate within the population, as well as provide insight to what monetary policies are available to the federal reserve to help stimulate the economy.
Creation of Money
Gold is the beginning source of the concept of money as we know it today. During the 16th century goldsmiths would hold gold for traders for a fee and a receipt would be given to the trader, what evolved from this practice is traders would exchange receipts in place of their gold. These practices eventually lead to goldsmiths lending receipts to traders and the like for interest on the loan provided, increasing the income of the goldsmith. U.S. banks today follow a similar practice that is regulated by the federal government. In essence commercial bank and thrift loans create money. Today instead of gold on reserve, a certain percentage of currency is held within the bank for reserve. This is called required reserves, “which is the amount of funds equal to a certain percentage of the banks own deposit liability” ( McConnell & Brue, pg. 6, chap. 14, 2004). These reserves thought may appear substantial, will not with stand the cash withdrawal of funds from all customers who have checkable deposits, this can lead to the ruin of such an institution. The theoretical aspect of this concept of creation of money by lending or borrowing is the belief that banks... [continues]
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