US ECONOMICS

US Economics



US Economics

Functions and purpose of money

The function of money as a measure of value is that the money (gold) provides the material to express the value of all other goods. In the developed market economy, money meets the following five functions; measure of value, medium of circulation, mean accumulation or hoarding, means of payment and world money. Every commodity, whatever its value is, is expressed in money. This makes it possible to compare quantitatively with each other's merchandise. Money serves as the measure of value to estimate the value of goods and services by means of price fixing. Money is also used during the registration value of any economic parameter or recording commitments (Smithin, 2002).

Central bank's role in a nation's monetary system

Central Bank of any country has the responsibility of handling its monetary policy. The discount rates and the money supply are controlled and directed by the central bank. It is the responsibility of the bank to ensure proper demand and supply of money so that inflation does not hinder the growth of the economy. Monetary policy refers to the set of decisions taken by the monetary authorities to seek stability in the value of money and avoid permanent imbalances in the balance of payments, and influence interest rates and inflation (Epstein & Martin, 2003). When it comes to monetary policy you are referring to money issues, particularly with the currency. There are three tools to conduct monetary policy:

Open Market Operations

When the Fed buys financial instruments it puts more money in circulation. With more money available, interest rates tend to decrease, and thus more money is borrowed and spent. When the Fed sells financial instruments money goes out of circulation, causing interest rates increase, making borrowing more expensive and therefore, less accessible.

Adjust the amount of reserves

A member ...