and why the dollar has value
Anything used as an exchange medium is considered to be money. Anything extensively used as a form of exchange is referred to as a medium of exchange” and thus qualifies to be referred to as “money.” For instance, Kent tobacco cigarettes were used as a form of exchange in Romania during the Communist Party’s reign in the 1980s; the idea that they could be traded for other products and services rendered them valuable and can be referred to as money (Smit et al., 2016). Like the value of products and services, money is also valued in terms of demand, what individuals are willing to exchange for money, and the amount of money available. The main reason why a dollar is valued is because of its acceptability. I value a dollar because I anticipate that a seller will accept it in return for their goods or services. The seller must assume that by accepting the dollar, it will also be accepted by other sellers in the future. The dollar’s ability to be used to purchase American products, services, and assets ultimately determines its worth.
Money supply in the United States
The total amount of money, coins, and deposits in all the bank accounts circulating is referred to as the money supply (Devadoss & Meyers, 1987). It is typically described as a bundle of safe assets that consumers and business enterprises can use to accept transactions or . For instance, many measurements of the money supply include balances in checking and savings accounts and U.S. cash. Measures of the money supply have occasionally shown quite close correlations with significant economic factors, including the actual gross domestic product and also the level of prices. Economists have claimed that the supply of money controls the price, is inflationary over the long run and offers crucial data about the economy’s near-term trajectory based on these links. Measurements of the money supply are occasionally a key consideration for the Federal Reserve when implementing monetary policy. The amount of money in circulation in the U.S. dropped from 6134500 USD in March 2022 to 5885200 USD in April.
The primary functions of the Fed and the role of FOMC in the economy
The Federal Reserve System (FRS) is the American central bank. It is popularly referred to as “the Fed” and is arguably the most powerful financial institution in the world. It was created to provide the country with a stable, flexible, and long-lasting financial and economic system (Meade & Sheets, 2005). Each of the 12 regional Federal Reserve Banks that make up the Fed is in charge of a specific country region. Participating institutions with no alternative funding sources play the role of the lender of last resort. Its responsibility is to guarantee the system’s financial stability.
Additionally, it serves as the primary financial institution regulator in the nation. The Federal Open Market Committee (FOMC), a division of the Federal Reserve System (FRS), directs open market operations to decide the future of budgetary policy in the United States. FOMC members gather eight times annually to decide whether to alter short-term monetary policy. To support the national economy’s expansion, the members vote on whether or not to change the policy. They result in either reselling or purchasing U.S. government bonds on the open market.
The role of the financial institutions in the U.S. financial system
Financial institutions’ primary responsibility is to give the economy liquidity so it can function at a greater level than it otherwise could. The Brookings Institute claims that banks achieve this in three ways: by providing loans, controlling markets, and allocating risk among customers. Financial institutions have a significant impact on the investment component. They make it easier for people to save money and make investments in the economy (Merton & Bodie, 1995), both of which are necessary for economic growth. Without banking institutions, people wouldn’t be able to benefit from changing interest rates, and the only way to save money would be to stuff it beneath your pillow in stacks.
Fractional Banking Reserve and its benefits to customers
Fractionally reserved banking is a method whereby a bank receives deposits, makes loans, and keeps enough money in reserve for depositors. In the United States financial market, the Federal Reserve System regulates bank operations and sets a cap on the number of money banks can lend out (Angel, 2016). The volatility of money is the main advantage of the fractional reserve for an economy. To put it another way, this system keeps money flowing from one person or organization to another. A thriving and healthy economy depends on the flow of money. The Fed altered member bank reserve requirements during the financial meltdown of 2008, increasing the amount of money available to meet depositor needs.
Tools for controlling the money supply by the Fed
The Fed’s four critical monetary policy instruments for regulating the quantity of currency in circulation are the reserve ratio, open market operations, discount rate, and earnings on reserves. When the money supply is high, the Fed sells government securities in an open market operation to reduce the amount of money in people’s hands. Also, the government increases the lending interest to discourage people from borrowing when the supply is high. It also decreases the reserve ratio to ensure banks reserve more money than they lend. Among the available tools, the most significant method is increasing the lending interest rates, which discourages people from borrowing; hence, the Fed can regulate the money in circulation.
How the money multiplier help determine the effects of monetary policy
The money multiplier explains how a smaller starting rise in the total amount of money causes a more considerable final rise. It also goes by the name “monetary multiplier,” and it denotes the extent to which changes in the volume of deposits impact the money supply (Kigabo, 2015). It shows the proportion of money stock to changes in deposits that are correspondingly less or larger. The Federal Reserve in the United States has the power to control the supply of money and the nation’s economy by altering the reserve ratio. The goal is to find a balance between preventing inflation and promoting economic growth.
Monetary policy vs. fiscal policy
Monetary policy is the term used to describe how central banks regulate the amount of money circulating in the economy. When there is a low amount in the economy, Feb usually applies the policy and makes financing less costly, which encourages borrowing, increasing the money supply. The the monetary sector to lower interest rates to stimulate a faltering economy. If the economy grows too quickly, the Fed may implement a stringent macroeconomic stimulus by raising the borrowing interest rates, which in turn ends up decreasing the money from circulation. Fiscal policy, on the other hand, deals with regulating the amount of tax revenue collected by the federal government and how it is utilized to strengthen the economy. When the government intends to stimulate the economy, they usually decrease tax rates and, in turn, increase the expenditure. When they want to control the money supply, the government usually increases taxes while decreasing spending to cool an overheating economy.
The money supply in the economy is a crucial determinant of economic growth.
Every country around the globe requires a central bank to help with financial regulations.
Financial institutions play a vital role in the development of the economy.
It is a requirement by the central bank for all the commercial banks to have fractional reserve funds.
Monetary policy is concerned with the economy’s money supply level, while fiscal policy deals with the amount of revenue collected.
Smit, J. P., Buekens, F., & Du Plessis, S. (2016). Cigarettes, dollars and bitcoinsan essay on the ontology of money. Journal of Institutional Economics, 12(2), 327-347.
Devadoss, S., & Meyers, W. H. (1987). Relative prices and money: further results for the United States. American Journal of Agricultural Economics, 69(4), 838-842.
Meade, E. E., & Sheets, D. N. (2005). Regional influences on FOMC voting patterns. Journal of Money, Credit and Banking, 661-677.
Merton, R. C., & Bodie, Z. (1995). A conceptual framework for analyzing the financial system. The global financial system: A functional perspective, 3-31.
Angel, J. (2016). On the ethics of fractional reserve banking. Journal of Competitiveness Studies, 24(3), 164.
Kigabo, T. (2015). Monetary and financial innovations and stability of money multiplier in Rwanda. Journal Issues ISSN, 2350, 157X.
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