Federal Reserve

Federal Reserve Paper
Kathy Routson Jones
Dr. Shari Lyman
April 19, 2010
Money is anything generally accepted as payment for goods and services and repayment of debts. For example, money functions as a medium of exchange, a unit of account, a standard of deferred payment, and a store of value. However, most modern textbooks list only three functions, medium of exchange, unit of account, and store of value, not considering a standard of deferred payment as a distinguished function, but rather consider it in the others.
      The Federal Reserve (Fed) or Central Bank has two tools. It can change the interest rates on the money it lends to banks. A higher interest rate makes money more expensive, thus discouraging banks to lend. Lowering interest rates causes the opposite effect. The second tool the Fed has is the power to change reserve requirements. A reserve requirement is the percentage banks must keep in their vaults of their total loan portfolio. Obviously, if the Fed lowers this requirement, the banks can increase their leverage and lend out more.
      Projections for real GDP growth in 2010 had a central tendency of 2.8% to 3.5%, a somewhat narrower interval than in November. Recent readings on consumer spending, industrial production and business outlays on equipment and software were seen as broadly consistent with the view that economic recovery was underway, although at a moderate pace. Businesses had apparently made progress in bringing their inventory stocks into closer alignment with sales and hence would be likely to raise production as spending gained further momentum. Participants pointed to a number of factors that would support the continued expansion of economic activity, including accommodative monetary policy, ongoing improvements in the conditions of financial markets and institutions, and a pickup in global economic growth, especially in emerging market economies. Several participants also noted that fiscal policy was currently...