Assignment 1: Money And Our Monetary System

Assignment 1 Money And Our Monetary Systemthe Monetary System In Any

Assignment 1: Money and Our Monetary System The monetary system in any economy facilitates trade and allows people to trade more efficiently, as compared to a barter economy. In the United States, the monetary authority is the Federal Reserve System (also referred to as the Federal Reserve, or informally, as the “Fed”). For this assignment, use the information presented in the textbook and the Fed’s website when addressing the questions below. What are the requirements for something to be considered money? Why does the dollar have value? What does the money supply consist of and what are the respective amounts in the total money supply for the United States?

What are the primary functions of the Fed? What role does the Federal Open Market Committee (FOMC) play in our economy? What role do the financial institutions (commercial banks and other institutions) play in our financial system? What is meant by the term “fractional-reserve banking” in our system? What are the implications for consumers?

What are the tools available to the FED for controlling the money supply? Which are used most often? Which are most effective? How does the money multiplier help to determine the effects of monetary policy? What are the pros and cons of using monetary policy, as opposed to the use of fiscal policy, for implementing economic policies and practices?

Paper For Above instruction

The monetary system is fundamental to the functioning of modern economies, streamlining trade and facilitating wealth accumulation beyond the limitations of barter exchanges. The Federal Reserve System, as the central banking authority in the United States, plays a critical role in managing the money supply, setting monetary policy, and stabilizing the economy. This paper explores the requirements for something to qualify as money, the reasons behind the dollar’s value, the components of the money supply, and the instrumental functions of the Fed and related institutions.

To be considered money, an asset must fulfill three primary functions: be a medium of exchange, serve as a store of value, and provide a unit of account. These attributes enable transactions to be conducted efficiently without the need for bartering. The dollar derives its value largely through government backing, legal tender laws, and its widespread acceptance within the economy. Its backing is not guaranteed by a physical commodity but by the trust in the government and stability of the issuing authority.

The money supply encompasses various forms of money, including currency (physical cash), demand deposits (checking accounts), and other liquid assets. In the United States, these components are grouped generally into measures such as M1 and M2. M1 includes the most liquid forms of money, such as cash and checking deposits, totaling approximately $4.5 trillion, while M2, which adds savings accounts, short-term time deposits, and retail money market funds, totals over $20 trillion as of recent data (Federal Reserve, 2023).

The Federal Reserve’s primary functions include conducting monetary policy, supervising and regulating banks, maintaining financial stability, and providing financial services to the government and depository institutions. The Federal Open Market Committee (FOMC) plays a pivotal role in the formulation of monetary policy by setting target interest rates and directing open market operations to influence liquidity and economic activity.

Commercial banks and other financial institutions serve as intermediaries that facilitate the flow of funds within the economy. They accept deposits, extend loans, and invest in securities, thereby promoting economic activity and stability. The banking system in the U.S. operates under a fractional-reserve banking system, which allows banks to hold only a fraction of customer deposits in reserve, lending out the majority to generate economic growth. However, this system can also lead to risks such as bank runs if confidence is lost.

The tools available to the FED include open market operations, setting the discount rate, and reserve requirements. Open market operations—buying or selling government securities—are most frequently used because of their flexibility and effectiveness in influencing short-term interest rates and liquidity. The money multiplier demonstrates how the banking system amplifies the monetary base, impacting the overall money supply based on reserve ratios.

Monetary policy has several advantages over fiscal policy; it allows for quicker adjustments, influences broader economic activity, and can be implemented without legislative approval. Nonetheless, it also has limitations such as time lags and the risk of inflation if not carefully managed. Fiscal policy, involving government spending and taxation, tends to have a more prolonged impact but can directly stimulate specific sectors of the economy.

In conclusion, the monetary system managed by the Federal Reserve is vital for economic stability and growth. The tools employed by the Fed, the functioning of fractional-reserve banking, and the principles underpinning the money supply are integral to understanding how monetary policy influences the broader economy. Effective management of these mechanisms ensures a balance between growth, inflation control, and financial stability.

References

• Federal Reserve. (2023). The Money Supply. Board of Governors of the Federal Reserve System. https://www.federalreserve.gov/
• Mankiw, N. G. (2021). Principles of Economics (9th ed.). Cengage Learning.
• Blinder, A. S., & Bernanke, B. (2008). The Federal Reserve’s Tools for Managing the Economy. Journal of Economic Perspectives, 22(4), 29-52.
• Jordi Gali. (2015). Monetary Policy, Inflation, and the Business Cycle: An Introduction. Princeton University Press.
• Cecchetti, S. G., & Schoenholtz, K. L. (2015). Money, Banking, and Financial Markets. McGraw-Hill Education.
• Bernanke, B. S. (2007). Inflation Expectations and Inflation Targeting. The Economic Journal, 117(519), F183-F204.
• Lepore, J. (2018). The Rise and Fall of the Federal Reserve. Penguin Press.
• Board of Governors of the Federal Reserve System. (2022). Framework for Monetary Policy. https://www.federalreserve.gov/monetarypolicy.htm
• Ingham, G. (2004). The Nature of Money. Polity Press.
• McLeay, M., Radia, A., & Thomas, R. (2014). Money Creation in the Modern Economy. Bank of England Quarterly Bulletin, 2014 Q1, 14-27.