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The purpose and function of money Essay

Money and banks can seem to be an interrelated objects, one acts as a tool, the other an entity to control that tool to promote economic growth and ensure stability. However, granted as the society continues to experience the after effects of the global economic crisis, those two objects now plays a vital role to salvage the situation. In this study, we will attempt to analyze what really is the function of money, and what is the role of the Federal Reserve System in our economy.

We will also analyze the current monetary policies created to improve the economic condition and state at least one step of that policy that confirms the Central Banks objective. The purpose and function of money Money can be considered as an instrument to be used as a for payment in exchange for goods and services; a store of value (Darity, 2008 p. 249) and “a standard unity to measure value” (Sheedy, 2009 p. 1).

To understand each of money’s qualities and purpose, a further discussion would be provided. First, as“medium of exchange” money has been the most convenient currency to purchase both goods and services, that is why this first quality is considered self-explanatory. As an “unit to assess economic value” the society now can have standard measurement for the value of goods and services available in the market, even the cost of labor can easily be identified and quantified.

And lastly, as “a means to store wealth” means that money’s value can be considered permanent (excluding the difference and impact of inflation) compared to other products; for example food, in which it has value when it’s fresh, however once spoiled it loses its value, same goes to appliance due to depreciation, value lost over a relatively short period of time. How the central bank manages a nation’s monetary system The Central Bank or the Federal Reserve System, “manages and controls the nation’s money supply and credit and operates at the center of the nation’s financial system” (Federal Reserve Bank, 2010).

It also ensures the continuity of business operations by providing improved payment services to other commercial banking institutions as well as lending the government money. But the two most important and impacting role of the Central Bank is their role on “implementing monetary policy” and “determine interest rates” (Federal Reserve Bank, 2010). “The central bank uses its ability to expand (and contract) its assets and liabilities to implement monetary policy” (Darity, 2008 p.

294). The monetary policies Central bank creates for the purpose of making sure that the financial institutions as well as the whole system is somehow stable (Darity, 2008 p. 295). The stated direction of recent monetary policy in the United States The recent monetary policy by the Federal Reserve is to focus on making sure that the effects of the global crisis would not that be too great that could cause a severe economic meltdown and to stabilize the whole financial system.

Basically, “the Federal Open Market Committee or (FOMC) maintained a target range for the federal funds rate of 0 to ? percent throughout the first half of 2010 with the purpose of continuing to promote economic recovery and price stability” (Board of Governors of the Federal Reserve System, 2010 p. 31). One policy action that the Federal Reserve has taken to confirm that direction According to the Monetary Policy Report to the Congress by the Central Bank last 21st of July of this current year it states that:

“The size of the Federal Reserve’s balance sheet remained at a historically high level in mid-2010. Total Federal Reserve assets on July 7, 2010, stood at about $2. 3trillion, about $100 billion more than at the end of 2009. The increase is largely attributable to the completion on March 31 of the Federal Reserve’s program to purchase agency debt and agency mortgage-backed securities. Securities holdings, the vast majority of Federal Reserve assets, increased from about $1. 8 trillion to about $2.

1 trillion over the first half of the year”. This means that the Federal Reserve is increasing their balance sheet and is doing whatever it can on its ability to save collapsing firms and other financial institutions and is basically done to grant support on improvement of the housing markets, mortgage lending and private credit markets (Board of Governors of the Federal Reserve System, 2010 p. 31). The effects of monetary policies on the economy’s production and employment.

The labor market with the effect of the monetary policy has modestly improved, from the previous 10% unemployment rate, it went down a little bit by 9. 75 % (Board of Governors of the Federal Reserve System, 2010 p. 14). There is also an increasing trend of job openings and hiring compared to the previous year. Layoffs also have decreased. However the number of people unemployed is still considered an all time high as 6. 8 million jobseekers are still looking for work (Board of Governors of the Federal Reserve System, 2010 p.

15). Industrial production has been consistently improving as it can be attributed to the rising business confidence improvement towards the last quarter. Conclusion In this study, we tackled the function and certain qualities of money. We also analyze the role of the Central Bank on managing and controlling the money supply. We tried to correlate its relationship and applied it to our current setting by focusing on its monetary policy objectives.

As we have discussed, we now know that the Federal Reserve has the ability to create certain policies and into effect improve economical condition, we saw economic production increase, together with modest improvement in unemployment rate, but the effects of these policies cannot be achieved overnight, since markets tend to change and given time would adopt based on the necessity of economic improvement. Reference List Board of Governors of the Federal Reserve System (2010). Monetary Policy Report to the Congress [PDF]. Retrieved from http://www.

federalreserve. gov/monetarypolicy/files/20100721_mprfullreport. pdf Federal Reserve Bank (2010). The Federal Reserve System Is the Central Bank of the United States. Retrieved from http://www. frbsf. org/publications/federalreserve/fedinbrief/central. html Darity, W. (2008). Money. International Encyclopedia of the Social Sciences. Vol. 5. 2nd ed. 249-253. Detroit: Macmillan Reference USA Sheedy, N. (2009). The Purpose of Money and the Dangers of Fiat Currency (Online). Retrieved from http://www. nolanchart. com/article7009. html

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