Federal Reserve
There are three purposes of money: to act as a medium of exchange; as a store of value and as a unit of account (Helfield, 2011). Money as a medium of trade facilitates exchange, in that the counterparties are able to trade money for goods, instead of trading goods for goods, which is more complicated. As a store of value, money does not deteriorate (save via inflation), which is not the case with perishable goods. Money is a unit of account, meaning that money has a readily understood value -- we all know what a dollar is, and this makes it easier to track the amount of money one has or the value of something.
A central bank manages a country's monetary system by managing the amount of money in the system. A central bank can do this in a number of different ways, known as monetary policy instruments. Three major ones are via interest rates (the cost of money), through reserve requirements (how much money that the banks must hold back from lending) and through open market transactions. The latter involves the purchase or sale of Treasury securities on the market. All three of these actions will impact the supply of money in the economy, and its cost.
Recent monetary policy in the United States is aggressively expansionist. The current policy is based on the Federal Reserve's mandates to manage the cost of money, inflation, unemployment...
With persistent high unemployment and low business investment, the Federal Reserve has embarked on a series of expansionist policies in order to promote the improvement of the prevailing macroeconomic conditions. To this end, interest rates are being held low and have been for a long time. The Fed also bought long-term bonds, resulting in lower long-term rates as well, and a further injection of money into the economy.
On November 3, 2011, the Fed announced that it is going to hold the target range for the federal funds rate to 0-0.25% (Federal Reserve, 2011). This is consistent with the Fed's policy of the past few years, with low interest rates to stimulate investment. The fed funds rate is the rate at which banks can borrow overnight. As a result of keeping this rate low, banks are able to lend out at low rates to their customers. A low cost of borrowing allows companies to invest in more projects, as the projects will be profitable at a lower threshold of earnings. The objective of this policy is to spur higher levels of business investment, which in turn will help to create jobs. One of the key mandates of the Federal Reserve is to stabilize employment. It is believed that the lower lending rate will help to maximize job creation in the economy in the coming months.
In the general,…
