CURRENT FEDERAL RESERVE POLICY

Current Federal Reserve Policy

Current Federal Reserve Policy

Introduction

The Federal Reserve acts as the central bank for the United Kingdom's economy by regulating the amount of money in circulation, appointing the federal interest rate and monitoring the flow of funds. The Fed also sets monetary and fiscal policies to regulate the economy and help control inflation, production and employment. Central bankers are conservative people. They take great care in implementing policy; they speak precisely; they explain changes completely; and they study the environment trying to pinpoint where the next disaster looms. Good monetary policy is marked by its predictability, but when the world changes, policymakers change with it. If a crisis hits and the tools at hand are not up to the job, then central bank officials can and will improvise.

The Purpose and Function of Money

Money is defined as a set of assets in an economy that people regularly use to buy goods and services from other people (Mankiw, 2007). The cash flow is one of the most important aspects of the circular flow between consumers and firms, because without money, consumers would not have a way to buy goods and services, and firms would not have a way to pay consumers for their labor given. Money has three different functions in the economy.( Mankiw, 2009)

The first function of money is as a medium of exchange. Consumers use money to purchase goods and services from other individuals or firms. The money, as a medium of exchange, is given out in return for something received. For example, Joe sells his services as a handyman. Susan is in need of someone to fix her leaky faucet, so she calls Joe. Joe fixes her faucet and Susan pays him in cash. In this example, money is used as a medium of exchange between Susan and Joe.

Money is also used as a unit of account, meaning a yardstick people use to post prices and record debts (Mankiw, 2007). As a unit of account, money can better demonstrate how much something is worth to a consumer.

The third function of money is as a store of value, making money an item that people can use to transfer purchasing power from the present to the future (Mankiw, 2007). A store of value could be stocks, bonds or any investment that will hold purchasing power. For example, if Barb purchases a bond for X amount of money that will mature in 5 years, Barb can wait 5 years and cash that bond in, which will give her the purchasing power she invested in the past. Barb could also wait a few more years after maturity and gain more than her original investment. By using money as a store of value, Barb has now guaranteed herself X amount of dollars in 5 years that she will then be able to spend.( Mankiw, 2009)

The Role of the Central Bank and the Monetary SystemThe Central Bank decides what actions are needed in the economy, depending on the issues surrounding the economy ...