Discuss the uses of money and how banks create money. Referencing the primary tools of the Federal Reserve, discuss how the Fed works to create money and design and implement monetary policy. Discuss why you feel monetary policy is or is not conducted independently in the US. Is the intended effect achieved? Be sure to document your response using reputable academic sources.
A bank is a multifaceted financial institution that performs two major functions: depositing currency held by public and... View the full answer
- Money performs the following functions. • Medium of exchange: Money has general acceptability as the most immediate medium of payment, it has a readily purchasing power. With these features, money facilitates the exchanges of goods and services. • Store of value: As a medium of exchange, it also helps in purchasing goods and services both in the present as well as in future. • Standard measure of value: Money acts as a yardstick to measure various goods and services. It becomes easy to compare the relative values of goods and services that are different with each other in various aspects. • Standard of deferred payments: Debts, Loans and future transactions can be easily dealt with the help of money.
- Jul 20, 2016 at 9:13am
- Federal funds rate is the interest rate at which banks lend overnight loans to each other. This implies that all the depository institutions can borrow money at this rate. This include savings bank, commercial banks and other eligible financial institutions. The same set of institutions act as lenders who lend money at this rate. The Fed does not set the federal fund rate. It targets the range in which it expects the federal funds rate to float. Since it is able to influence the demand and supply of bank reserves through its open market operations, the Fed is able to come very close to hit this target range. Though the federal funds rate do not directly influence the demand decisions of households and firms, it brings changes in the interest rates on both short term and long term financial instruments like Treasury bills, mortgage loans and corporate bonds. If the Fed is able to lower the federal funds rate, it can then increase banks reserves. Banks can then lend out these reserves to households and firms. Discount rate is the rate of interest charged by the Fed from banks who borrow money from it usually on short-term basis. Discount rate is different from federal funds rate as it is charged by the Fed to all the banks who borrow from it. The federal funds rate, on the other, is charged by banks themselves when they lend overnight loans to each other. In this sense, the Fed can increase or decrease the liquidity in the market and can stimulate or depress Aggregate Demand. And by influencing Aggregate Demand, the Fed can control price level (inflation) and real GDP (employment), at least in short term.
- Jul 20, 2016 at 9:14am