Federal Reserve

Essay by buttons87University, Bachelor'sA+, April 2009

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The Federal Reserve acts as the central bank for the United States economy by regulating the amount of money in circulation, appointing the federal interest rate and monitoring the flow of funds. The Fed also sets monetary and fiscal policies to regulate the economy and help control inflation, production and employment.

The Purpose and Function of Money

Money is defined as a set of assets in an economy that people regularly use to buy goods and services from other people (Mankiw, 2007). The cash flow is one of the most important aspects of the circular flow between consumers and firms, because without money, consumers would not have a way to buy goods and services, and firms would not have a way to pay consumers for their labor given. Money has three different functions in the economy.

The first function of money is as a medium of exchange. Consumers use money to purchase goods and services from other individuals or firms.

The money, as a medium of exchange, is given out in return for something received. For example, Joe sells his services as a handyman. Susan is in need of someone to fix her leaky faucet, so she calls Joe. Joe fixes her faucet and Susan pays him in cash. In this example, money is used as a medium of exchange between Susan and Joe.

Money is also used as a unit of account, meaning a yardstick people use to post prices and record debts (Mankiw, 2007). As a unit of account, money can better demonstrate how much something is worth to a consumer.

The third function of money is as a store of value, making money an item that people can use to transfer purchasing power from the present to the future (Mankiw, 2007). A store of value could...