Federal Reserve

Federal Reserve
Sarah Martin
ECO 212
January 5, 2010
Nicholas Briscoe

Federal Reserve
This paper will define the purpose and function of money.   It will explain how the Federal Reserve manages the nation’s monetary system.   This paper will also outline the stated direction of recent monetary policy in the United States.   It will list at least one policy action that the Federal Reserve has taken to confirm that direction.   In addition, this paper will explain the effects of monetary policies on the economy’s production and employment.
Money is assets that people are generally willing to accept in exchange for goods and services or for payment of debts (Hubbard & O'Brien, 2010).   The most common use is cash.   When defining the purpose of money, one must define its functions.   Money has four functions: money is a medium of exchange, a unit of account, a store of value, and a standard of deferred payment.
A medium of exchange is a “commodity, currency, or a financial instrument used in commercial transactions between buyers and sellers as a measure and standard value” (BusinessDictionary.com, 2010).   For example, when a person goes to the store to buy groceries he or she pays the cashier with money for the groceries.   Money as a unit of account is a measurement used to understand the value of a good or service or a debt.   If a coloring book costs $1 dollar and a bed costs $300, the bed may be worth 300 coloring books.   This is a unit of account or barter system.   One item can have many prices so this function gives buyers and sellers a way of measuring value in terms of money.   Money as a store of value is any form of commodity, asset, or money that has value and can be stored and retrieved over time (Investopedia.com, 2010).   Stocks and bonds are great examples of this.   Deferred payment is money owed that will be repaid at a later date (QFinance.com, 2009).   When a student uses a loan to complete college, the bank pays the school the money and the...