Money And The Federal Reserve Essay

785 WordsNov 10, 20094 Pages
Money and the Federal Reserve Money is used in everyday lives but is rarely thought about. Analyzing the true meaning of money and its purpose in our economy shows that it is more than just pieces of paper. Money is defined as “set of assets in the economy that people regularly use to buy goods and services from other people” (Mankiw 2007). The central bank of the United States is the Federal Reserve, or Fed. The Fed regulates our fiat monetary system. The Fed and money is intertwined in my everyday life, and I usually don’t think about their true purpose and meaning. The three functions of money are medium of exchange, unit of account, and store of value. I look at money as a medium of exchange everyday. When I go to the store and want to buy food, I exchange money that I have for the food the store has. Unit of account is how money is measured. When I am at the drive through at McDonalds I know that something from the dollar menu is a 1/10th the price of a burger from Red Robin. I don’t think of a Red Robin burger is the same as 10 McDonalds dollar menu cheeseburgers, but one is one dollar and the other is 10 dollars. Money is the unit of measure for the things I buy. The third function of money is store of value. The simplest way to explain store of value is that the piece of paper the store gets from you for your food purchase will store its value and be worth something the next day. Because our money is no longer backed by gold and only by faith, the US considered to be a fiat monetary system (Mankiw, 2007). A fiat system needs regulating. Since the money in this system can be printed and more can be added to the economy at any time, there needs to be some type of regulating. This is called a central bank. The Federal Reserve, US’s central bank, is ran by a group of seven chosen by the President and approved by the Senate.

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