Federal Reserve and Monetary Policy

Money is the medium of exchange for goods or services. Money is also used to measure the values on the commodities in the market. There is a direct relationship between money and price. When the price of a commodity increases, then the value of money decreases. According to Mankiw (2007), this direct relationship between the prices and the value of money gives a clear understanding of the impact of money on the economy. Essentially, the primary goal of the United States monetary banking system is to maximize production and employment by balancing the relationship between money and price. This goal is accomplished through the Central Bank of America, more commonly known as the Federal Reserve Bank.
The Federal Reserve System is responsible for the regulation of the money supply and circulation of currency in the country. The Federal Reserve manages the economy through the monitoring and governing of banks. To perform this huge task, they have organized the Federal Open Market Committee (FOMC). This committee meets regularly to discuss economic concerns and to make changes as soon as they arise. The Committee overseas everything from shortages of money to regulating of fair banking practices. The committee deals with long-term and short-term monetary issues including money shortages, inflation, deflation, and even the current mortgage crisis the country experienced (Federal Reserve Bank, 2010).
For instance, if the committee identifies an economic problem, they will immediately inform the Federal Reserve. The Federal Reserve would then take necessary action. In an example, suppose the committee sees that the housing market is beginning to dip. The committee will inform the Federal Reserve and in turn the Fed will lower interest rates to boost housing sales.   Lowering of interest rates can be a significant action as the interest rates on car loans, personal loans, and commercial loans are affected. The lower of interest...