ECO 372 Week 3 DQ 1 How Do Commercial Banks And Federal Banks Create Money

What are the uses of money? How do commercial banks and Federal banks create money? Is monetary policy conducted independently in the United States? Explain your answer. Is it important for monetary policy to remain independent from all parties? Why or why not?

What are the uses of money?
In history, many things have been used as money (barter items), such as salt, cattle, pigs, goats, tobacco, gold, iron, etc. An item serves as money when everyone is willing to take it in exchange. Everyone uses money, we all want it, work for it and think about money. Money is the way we get the things we want and need. Money isn’t just a piece of paper or a coin, it’s a medium of exchange the facilitates trade. If I go to the store, I need a positive amount of funds in my checking about to buy that irresistible sweater. How do commercial banks create money?
Banks are like other businesses. Their product is money, other businesses sell widgets or services, bank sell money in the form of loans, certificates of deposits, and other financial products. They make money on the interest they charge on business loans or personal loans. The interest rate a bank charges its borrowers will depend on both the number of individuals who want to borrow and the amount of money the bank has available to lend.
How do Federal banks create money?
The Fed is the gatekeeper to the U.S. economy. It happens to be the central bank of the United States, the bank of banks of the U.S. Government. The Fed has a responsibility regulates financial institutions, manages the nation’s money and influences the economy. The Fed raises and lowers interest rates, creating money and can either stimulate or slow down the economy. By manipulating the economy this helps maintain to lower inflation, help high employment rates, and manufacture outputs.
Is monetary policy conducted independently in the United States? Explain your answer.
The Fed is independent of Congressional appropriations and administrative control. It is accountable to Congress and comes under government audit and review. The Fed reports regularly to the Congress on monetary policy, regulatory policy, and a variety of other important issues. Is it important for monetary policy to remain independent from all parties? Why or why not?
Monetary policy refers to the actions the Fed takes to influence financial conditions in order to help it achieves goals. The Fed has a primary control by raising and lowering short-term interest rats. The Fed can indirectly influence the economy.

If interest rates are lowered, borrowing money to make purchases becomes less expensive and this helps to motivate individual spending to help with economic growth. The object of the monetary policy is to influence the performance within the government, the Fed is accountable to the Congress and its goals are set by laws, and affected by political pressures. The people who control the country’s money supply should be independent of the people who frame the government’s spending decisions.

http://money.howstuffworks.com/personal-finance/banking/bank4.htm