The US Federal Reserve’s Monetary Policy

Define the purpose and function of money

The purpose and function of money are to devise an artificial value. It is later on used as a medium of evaluating a good or service. Money was mainly invented to facilitate the exchange of goods and values between people (Mankiw, 2007, p. 15). It is the purpose it has been serving to ensure that people get what they want easily rather than using other means that may prove cumbersome.

Money is aimed at facilitating the growth of wealth. It is meant to enhance trade that will serve everybody’s interests well (Mankiw, 2007, p. 9). Money can therefore be used as a medium of exchange as it circulates the economy. On the other hand, money can also be used as a unit of account.

This means that the prices of different commodities can be expressed in monetary terms. Money also serves as a store of value. It means that people can use it to transfer purchasing power from the present to the future (Mankiw, 2007, p. 11). Money has proved to be a very important asset in our lives that we cannot afford to do without it.

Explain how the central bank manages a nation’s monetary system

The central bank manages a country’s monetary system by either increasing or decreasing monetary supply. By doing this, it can either increase or slow down the rate of inflation in a given country. On the other hand, it can also affect interest rates at a given time (Mishkin, 2007, p. 14). Monetary supply can also be used to control the rate at which services and goods will increase in evaluation.

This about how different goods relate to one another. Also, the central bank has various tools that it can use to do this. It has the option of changing interest rates on the money it lends to commercial banks (Mankiw, 2007, p. 17). Low-interest rates will make money cheap and encourage lending. The central bank can also use reserve requirements by changing them.

Reserve requirement is the amount of money that banks need to keep in their vaults about their loan portfolio. In this case, it is evident that if the central bank lowers this requirement, banks will lower their leverage rate and lend out more to the economy (Mishkin, 2007, p. 24).

Outline the stated direction of recent monetary policy in the US

Some various programs and tools have been implemented about the financial crisis. The monetary policy has been enhanced to guarantee transparency and accountability. The Federal Reserve has come up with several liquidity and credit programs to enhance the liquidity of financial institutions in the country (Federal Reserve Bank, 2010, p. 14). It has been enhanced by open market operations.

The main aim has been to improve conditions in financial markets. For instance, there have been some value offerings from different perspectives (Federal Reserve Bank, 2010, p. 23). It is more so under the Term Deposit Facility, which is meant to enhance its operational readiness. It will also provide eligible institutions with an opportunity to gain familiarity with expectations.

The Federal Reserve has also completed the purchase of $ 1.25 billion (Federal Reserve Bank, 2010, p. 27). It is more so in the agency- guaranteed mortgage-backed securities. There have been open market operations to implement a good monetary policy direction.

Policy action that has been undertaken by the Federal Reserve

The Federal Reserve has been engaged in different Open market operations. Permanent OMOs have been used to accommodate long term factors. Temporary OMOs have been characterized by different sales and purchases of securities. For instance, the Federal Reserve has established a near-zero target range for the federal fund rates (Federal Reserve Bank, 2010, p. 8).

On the other hand, there has been an increase in the number of reserve balances to reduce costs and increase credit. Credit has been majorly made available to enhance the purchase of houses. It has also created structural deficiencies. Also, there has been a SOMA portfolio through the purchase of US securities in the open market (Federal Reserve Bank, 2010, p. 14).

Explain the effects of monetary policies on the economy’s production and employment

There are various effects of monetary policies on the economy’s production and employment. It can be viewed from different perspectives. For instance, we can look at both the low interest and high-interest cause. In cases where we have a low-interest rate, there will be more available funds (Mankiw, 2007, p. 27). It will create a greater expansion in the economy, increasing production. In the long run, increased production will increase employment opportunities.

On the other hand, if there are high-interest rates, there will be few funds. Few funds mean that people will not be in a good position to access credit. This means that the economy will not experience vibrant expansion and production activities (Mishkin, 2007, p. 27. Without production, there will be few employment opportunities due to poor sustainability. In other words, it can be said that should the economy follow a tight monetary policy there will be slow growth and employment.

Information Technology Agreement

It is a WTO sponsored agreement that was concluded at the Singapore ministerial conference in 1996 (WTO, 2010, p. 5). It was initially signed by 29 countries. There was some uncertainty as per when the declaration would come into effect. 29 signatories had not reached the trade coverage criteria by 1997. It is because they only accounted for 83% of the world trade in information technology-related products (WTO, 2010, p. 7). Other countries have been notifying their interest as time goes by.

After achieving a 90% threshold, ITA was able to enter into full force in 1997. The first stage is achieved by the reduction of tariffs. On the other hand, ITA can be said to be a tariff-cutting mechanism (WTO, 2010, p. 9). The review is mostly concerned with nontariff barriers, but there are no binding commitments about these. For a country to become a member, it must abide by some principles. All products must be reduced to a zero level tariff. Also, all listed products are supposed to be covered. On the other hand, charges and duties must be bound at zero rates.

The declaration implies that there will be no exemptions on sensitive items. These benefits accrue to other WTO members under ITA (WTO, 2010, p. 11). There is a formal committee under WTO that carries out these provisions. Up to date, there have been five formal meetings as far as this agreement is concerned. The committee has rules like those that apply to other WTO bodies.

Also, this committee has worked on several issues as far as information technology is concerned (WTO, 2010, p. 12). WTO has insisted that participants will periodically review these agreements implementation on product coverage. The review started in 1997, where members are expected to submit their proposals on the way forward.

Reference List

Federal Reserve Bank. (2010). Monetary policy. Web.

Mankiw, N, G. (2007). Macroeconomics. New York: Worth Publishers.

Mishkin, F, S. (2007). The Economics of Money, Banking, and Financial Markets. Boston: Addison Wesley.

WTO. (2010). Information Technology Agreement — introduction. Web.

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