The Monetary System In Any Economy Facilitates Trade And Mor ✓ Solved

The Monetary System In Any Economy Facilitates Trade And Allows People

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?

Sample Paper For Above Instruction

Introduction

The monetary system plays a crucial role in facilitating trade, promoting economic stability, and fostering growth within a country. In the United States, the Federal Reserve System (the Fed) serves as the central bank responsible for managing the nation's monetary policy and ensuring financial stability. This paper explores the fundamental requirements for money, its functions, the components of the money supply, and the mechanisms used by the Fed to regulate economic activity.

What Constitutes Money and Why Does the Dollar Have Value?

For an asset to be considered money, it must possess certain key characteristics: acceptability, durability, divisibility, uniformity, limited supply, and ease of transport. Money serves as a medium of exchange, a store of value, and a unit of account (Mishkin, 2018). In the US, the dollar has value because it is backed by the trust of the public and has legal tender status, enforced by government decree (Federal Reserve, 2023). Its value is also maintained through the stability provided by monetary policy and confidence in the economic system.

The Composition of the Money Supply

The money supply encompasses various forms of money circulating within the economy, primarily classified into M1 and M2. M1 includes physical currency, checkable deposits, and other liquid assets used directly for transactions. M2 encompasses M1 plus savings deposits, money market securities, and other near-money assets (Mishkin, 2018). As of 2023, the approximate figures are:

• M1: $4.7 trillion
• M2: $20 trillion

This indicates that the majority of the money supply comprises less liquid assets, contributing toward overall economic liquidity.

Functions of the Federal Reserve

The Federal Reserve performs several essential functions, such as conducting monetary policy to control inflation and unemployment, supervising and regulating banking institutions, maintaining financial stability, providing financial services to the government and the public, and managing the nation's payments system (Board of Governors of the Federal Reserve System, 2023).

The Role of the FOMC

The Federal Open Market Committee (FOMC) is responsible for open market operations, setting target interest rates, and guiding the overall stance of monetary policy. It meets regularly to assess economic conditions and decide whether to expand or contract the money supply through the purchase or sale of government securities (Mishkin, 2018).

The Role of Financial Institutions

Commercial banks and other financial institutions are vital players in the financial system, acting as intermediaries that facilitate credit creation, promote savings, and provide financial services. They operate under the regulations established by the Fed and the Fed’s policies influence their lending and deposit behaviors (Cecchetti & Schoenholtz, 2020).

Fractional-Reserve Banking and Consumer Implications

Fractional-reserve banking allows banks to lend a portion of their deposits while holding reserves, which leads to the creation of money through the lending process (Mishkin, 2018). For consumers, this system enables greater credit availability but also introduces risks such as bank runs if confidence falters.

Tools of the FED to Control Money Supply

The Fed has several monetary policy tools, including open market operations, discount rate adjustments, reserve requirement changes, and forward guidance. Open market operations are most frequently used due to their flexibility and immediate impact. The money multiplier concept demonstrates how changes in the monetary base can lead to larger changes in the overall money supply, depending on the reserve ratio and banking behavior (Cecchetti & Schoenholtz, 2020).

Pros and Cons of Monetary Policy

Monetary policy offers the advantage of quick implementation and less political interference compared to fiscal policy, allowing the Fed to respond swiftly to economic changes. However, it may have limitations, including time lags and the risk of triggering inflation or asset bubbles if misused (Mishkin, 2018). Fiscal policy, involving government spending and taxation, can target broader economic issues but often faces political hurdles and slower implementation.

Conclusion

• The functions and components of money are foundational to economic activity.
• The Federal Reserve plays a critical role in managing the U.S. economy through monetary policy and regulation.
• Tools such as open market operations are vital for controlling the money supply effectively.
• Balancing monetary and fiscal policy is essential for sustainable economic growth and stability.

References

• Cecchetti, S. G., & Schoenholtz, K. L. (2020). Money, Banking, and Financial Markets. McGraw-Hill Education.
• Federal Reserve. (2023). The Federal Reserve System's Role in the Economy. https://www.federalreserve.gov/about-the-fed.htm
• Mishkin, F. S. (2018). The Economics of Money, Banking, and Financial Markets. Pearson.
• Board of Governors of the Federal Reserve System. (2023). What Are the Main Functions of the Federal Reserve? https://www.federalreserve.gov/aboutthefed.htm
• Cecchetti, S. G., & Schoenholtz, K. L. (2020). Money, Banking, and Financial Markets. McGraw-Hill Education.
• Federal Reserve. (2023). Monetary Policy and the Role of the FOMC. https://www.federalreserve.gov/monetarypolicy.htm
• Cecchetti, S. G., & Schoenholtz, K. L. (2020). Money, Banking, and Financial Markets. McGraw-Hill Education.
• Mishkin, F. S. (2018). The Economics of Money, Banking, and Financial Markets. Pearson.
• Board of Governors of the Federal Reserve System. (2023). Financial Stability and Regulation. https://www.federalreserve.gov/regoffice.htm
• Cecchetti, S., & Schoenholtz, K. (2020). Money, Banking, and Financial Markets. McGraw-Hill Education.