Top-Rated Free Essay
Preview

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

Good Essays
511 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
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

You May Also Find These Documents Helpful

  • Satisfactory Essays

    Money is anything which people are willing to accept in exchange for goods and services.…

    • 661 Words
    • 2 Pages
    Satisfactory Essays
  • Better Essays

    The Role of Money in the U.S. Economy If you ask the average person what money is, you are undoubtedly going to receive some very strange looks. Money is a concept that many people take for granted. We know that money allows us to acquire goods and services, but what is its source of value? Money is paper, which is for all practical purposes; no different than the paper this text is written on. How then would anyone in his or her right mind trade a tangible object (like a new stereo or television) for it? Money plays a key role in our lives, but few people are totally free of misconceptions about it.…

    • 2441 Words
    • 7 Pages
    Better Essays
  • Satisfactory Essays

    Importance Of Money

    • 343 Words
    • 1 Page

    First of all , people need money to keep healthy. If people get ill, and do not have enough money, they cannot go to the hospital to check and buy some kinds of medicine. Besides, they also do not get good treatment from the doctors and nurses in the hospital. Moreover, they can buy a lot of good medicine and checking their health in the hospital. Therefore, people cannot resolve their health problems without money, so money is a useful thing.…

    • 343 Words
    • 1 Page
    Satisfactory Essays
  • Good Essays

    Does Money Give Power?

    • 593 Words
    • 2 Pages

    People all over the world are exerting this power that comes with money. Every time we buy something we are exerting this power. Money can also be used to gain other types of power. It can be used to buy weapons and to influence people 's opinions. So money goes hand in hand with many types of power and can be expressed in different ways.…

    • 593 Words
    • 2 Pages
    Good Essays
  • Good Essays

    The Federal Reserve

    • 1149 Words
    • 5 Pages

    by congress to control monetary policy, the use of changes in the amount of money in…

    • 1149 Words
    • 5 Pages
    Good Essays
  • Powerful Essays

    Credit Creation

    • 1793 Words
    • 8 Pages

    1.1.3 Central Bank, Reserve Bank or Monetary Authority is a public institution that manages a state 's currency, money supply, and interest rates. Central banks also usually oversee the commercial banking system of their respective countries. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the nation 's monetary base, and usually also prints the national currency, which usually serves as the nation 's legal tender (www.en.wikipedia.org).…

    • 1793 Words
    • 8 Pages
    Powerful Essays
  • Good Essays

    Money

    • 500 Words
    • 2 Pages

    The most obvious function of money is as a medium of exchange. When you hand the waiter a five-dollar bill in exchange for your hamburger, you are using money as a medium of exchange. You might have a hard time paying for your hamburger with five dollars worth of apples, but if you did, the apples would serve as a medium of exchange as well. To simplify, a medium of exchange is something that buyers give to sellers in exchange for goods and services. Perhaps money's most compelling advantage is that it is a commonly recognized and universally accepted medium of exchange. This allows anyone with money to walk into any restaurant with the confidence that the waiter or clerk will take your cash in exchange for goods or services. This would likely not be the case with a basket full of apples.…

    • 500 Words
    • 2 Pages
    Good Essays
  • Better Essays

    The Federal Reserve System

    • 1267 Words
    • 6 Pages

    The Federal Reserve Bank, also known as the Fed, has been a vital part of the financial system for almost 100 years. The Fed is broken down into 12 districts or Reserve Banks. These 12 Reserve Banks have branches in specific states in which they serve. Each district funds its own operations primarily on interest on its loans and the securities it holds. Also, the Fed controls the U.S. money supply by selling and buying treasury bonds in the open market. It keeps inflation in check and employment high and keeps track of other dangers in the market that could affect the economy (White, Lawrence). But, the main purpose of the Fed’s creation is to carry out the policies of the Federal Reserve System.…

    • 1267 Words
    • 6 Pages
    Better Essays
  • Powerful Essays

    What Is Money?

    • 1390 Words
    • 6 Pages

    Money serves as a medium of exchange: it is used to pay for goods and services. By serving as a medium of exchange, money promotes economic efficiency be reducing transaction costs: the time and effort spent in exchange. Without money, trade must take place through barter. But barter can be quite costly, it can take time for you to find someone who both: Has the good that you want. Wants the good that you have. This is the problem of finding a “double coincidence of wants.” Money can solve this problem, since everyone will accept it.…

    • 1390 Words
    • 6 Pages
    Powerful Essays
  • Better Essays

    Before further reviewing the monetary policy function of the Federal Reserve, a general overview of the entire bank and its functions needs to be established. The Federal Reserve is often referred to as the Central Bank of the United States. It was established by the United States Congress in 1913 to improve the economic state of the country by ensuring financial stability. Before it was established, the economic state of the United States was shaky to say the least. Congress created the National Monetary Commission to create an institution that would prevent and contain crisis in the future. Ultimately, this led to the Federal Reserve Act and then the Federal Reserve Bank. The bank was originally established to help be a financial back bone for depository institutions in times…

    • 1601 Words
    • 7 Pages
    Better Essays
  • Satisfactory Essays

    atomic bomb in japan

    • 536 Words
    • 2 Pages

    Money is something that people use every day. We earn it and spend it but do not often think much about it. Economics define money as any good that is widely accepted as final payment for goods and services. Money is so common that we rarely think about what it is. The characteristics of money include durability, divisibility, portability, and scarcity. Money acts as a unit of account, medium of exchange, and a store of money.…

    • 536 Words
    • 2 Pages
    Satisfactory Essays
  • Powerful Essays

    AFC2000

    • 13905 Words
    • 48 Pages

    Money acts as a medium of exchange and it is important to the efficiency of the financial system. It overcomes the divisibility problem caused if the mediums of exchange are not equal. Money helps by providing all participants with a means of exchanging value.…

    • 13905 Words
    • 48 Pages
    Powerful Essays
  • Powerful Essays

    banking marketing

    • 5342 Words
    • 18 Pages

    Banks borrow money by accepting funds deposited on current accounts, by accepting term deposits, and by issuing debt securities such as banknotes and bonds. Banks lend money by making advances to customers on current accounts, by making installment loans, and by investing in marketable debt securities and other forms of money lending.…

    • 5342 Words
    • 18 Pages
    Powerful Essays
  • Satisfactory Essays

    The Fed is relatively independent. It has the independence to conduct its business how it sees fit as long as it falls under the legislation established by Congress. Congress gave it six explicit functions:…

    • 507 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    Money Is King Analysis

    • 12201 Words
    • 49 Pages

    I cannot define what money is, save to say that it is a piece of paper or coin that you can use to buy something. There are definitions in many books but this book is not for scholarly purposes, as such I would restrict the meaning of money to the tone of the message in the book. I should also add to say that money has some value and is worshiped by humanity for this reason. It is the world’s most sought after “thing”. Today money is the only means to buy anything, whatever…

    • 12201 Words
    • 49 Pages
    Good Essays