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    Federal Reserve and Monetary Policy

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    For this project please use the information from the Federal website (http://www.federalreserve.gov/) when addressing the questions below.

    1) What are the requirements for something to be considered money? Why does the dollar have value?

    2) What does the money supply consist of and what are the respective amounts in the total money supply for the United States?

    3) What are the primary functions of the Fed? What role does the Federal Open Market Committee (FOMC) play in our economy?

    4) What role do the financial institutions (commercial banks and other institutions) play in our financial system?

    5) What is meant by the term "fractional-reserve banking" in our system? What are the implications for consumers?

    6) What are the tools available to the FED for controlling the money supply? Which are used most often? Which are most effective?

    7) How does the money multiplier help to determine the effects of monetary policy?

    8) What are the pros and cons of using monetary policy, as opposed to the use of fiscal policy, for implementing economic policies and practices?

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    Solution Preview

    1) Requirements to be Considered Money
    The following are some requirements for something to be considered money:
     Unit of measurement of exchange value
     Medium of exchange
     Store of exchange value for future use
    The U.S. dollar has value in the global market. It is because; dollar is the world's dominating currency in terms of their presence, higher exchange rate and market valuation. Along with this, most of the transactions in international trade related to trade of crude oil, gold and goods are completing in dollar that's why dollar has value (Madura, 2009).

    2) Elements of Money Supply
    There are two important measures of money supply, M1 and M2, which are useful to determine amount of money supply in the economy. Under the M1 measure, the money supply consists of cash in circulation, demand deposits, traveler's checks etc. In the case of M2 measure, the money supply consists of saving deposits, money market mutual funds and money market deposit accounts (Fabozzi & Peterson, 2003).
    The respective amounts of M1 and M2 in the total money supply for the United States during this year are summarized in the table below:
    M1 (Billions of Dollars) M2 (Billions of Dollars)
    Jan 2012 2223.2 9747.8
    Feb 2012 2217.5 9777.5
    March 2012 2224.7 9811.8
    April 2012 2253.1 9856.6
    May 2012 2243.2 9888.2
    June 2012 2253.5 9930.5
    July 2012 2316.5 10004.7
    August 2012 2331.1 10041.9
    Sep 2012 2382.6 10126.6
    Oct 2012 2418.6 10221
    Nov 2012 2395.9 10269.6
    (Source: Board of Governance of the Federal Reserve Bank, 2012)

    3) Primary Functions of Federal Bank
    The following are the primary functions of Federal Bank.
     Supervision and regulation of banking system and other financial institutions.
     Conducting monetary policy by setting short-term interest rates.
     Providing financial services to commercial banks and U.S. federal government.
     Maintain stability in the financial system of the country (Board of Governance of the Federal Reserve Bank, 2012).
     Controlling of money supply in the economy.

    Role of Federal Open Market Committee (FOMC)
    FOMC is an important part of the Federal Reserve Board that is responsible for open ...

    Solution Summary

    The requirements for something to be considered money is determined.