Us Federal Reserve Monetary Policy


The only way to truly define money is in the framework of a vibrant economy where markets and other institutions exist in a society where there are laws and sutoms. Money is a network that is used for goods and services.

Key economic properties of money are: a means of payment, a store of value, and a numeraire. There are several physical properties of money. Transportability, durability, and cognizability are just a few. The basic control means of any society is the ability to control the money and manipulate the money rate of interest.

However, money does not provide a steady standard of measure. It is flexible, simple, and a varying store of value. The conditions required to guarantee that a unit of money is the same value in each period are hardly ever encountered. Money does not uphold a exact value throughout time, but permits prices to change in a flexible manner.

The central bank uses a monetary policy as a tool to manage money, credit, and interest rates. The US Federal System, The Bank of Japan, and the Bank of England all comprise the central bank system. A central bank provides a range of services to commercial banks. The central bank holds deposit accounts and operates a system for inter-bank payments that enables commercial banks to transfer balances in these accounts to one another (reference). The central bank provides loans to commercial banks during times of crisis. In short, the central bank is the accountant for the government. When the government wants to make or receive a payment it needs a bank just like the rest of us (reference). In order to do this, the government gives the central bank permission to print money.

This makes the central bank very unique. If the central bank wants to make a purchase, it simply creates the means to do so. The central bank can also expand the size of its balance sheet at will. When a central bank increases its assets, it is matched by an increase in commercial...