The main utility of money is the valuation of commodities and services used by the public of a particular nation. The purpose of money is transaction and it is also used to facilitate dealings between shopper and vendor in any market. The money has to be accepted as a legal tender by all parties participating in the trade and the denominations should be relative to the item being sort after. Money serves the purpose of determine the amount of possessions that an individual has, is a standard measure of wealth. It is used in the valuation of many items and tangible goods and services are measured in monetary form so as to quantify them. Money can be saved for future use and borrowed lest the borrower intends to make a large purchase outside his saving (Reden, 2010).
The act of saving cash and borrowing money is what prompts the system to have a central depository to control the inflow and outflow of cash to the nation. The presence of large sums of cash in the economy makes the currency lose its value and thus a large sum of money is used to purchase commodities in the country. Inflation is the term used to depict to this scenario. To control this, Federal Reserve has to be increased in the course of the sale of bonds at competitive rates. The interest rates of loans increases to discourage borrowing and the reserves are enforced on depository, they require a bank to maintain a given amount of money in it vaults. The central bank has to maintain the balance of money in the economy, in a scenario where the economy lacks money. The expenditure becomes so high that the citizens buy goods at lofty prices. For rectification, the central bank through the commercial banks offers loans to the public at low rates restoring the cycle. The central reservoir also protects the states’ currency against foreign currency by controlling the currency exchange rates amid nations (Gitman, 2009).
The monetary plans are meant for the reduction of inflation in the economy of the United States. Reducing inflation in the country is aimed at lowering the prices of commodities. The way to achieve this policy is during the sale of bonds to the citizens to release money stored in the Federal Reserve. The banks have also been instructed by the central bank to offer loans to the citizens at bargain rates to allow the public to obtain funds and thus the economy is recovering. The reserves of the bank are set to low levels compared to before. The reduced loan rates have lead to an increase in self employment and thus more citizens have been able to raise their value of living. The intention of the Federal Reserve to buy six hundred billion dollars worth of treasury bills is an action seen to rescue the economy of the United States but it is also seen by others to make the rich people richer because under the current economic situation they are the ones able to buy large sums of this bonds. To prevent the economy from plunging again measures have been put to work to accommodate the pressures of the economic recovery. The policy action of selective credit policy is aimed at developing some of the critical sectors that offer vital services or give more to the economy than the others. The risk of this is that the other small sectors may suffer and desterilizes the economy. The Federal Reserve has also to be monitored closely to prevent the economy from running out of cash causing inflation. The concerns lie in the ability of the Federal Reserve to drain the economy before it is too late. The report on the reserve is viewed twice in a year by congress and the public watchers it keenly due to its impact on the interest rates (Hafer, 2005).
The monetary policies may cause an increase or decrease in the rate of interest that the banks advance loans to its customers. In a situation that the policies are strict, the bank rates will be high. High rates discourage loans and thus the reserve will have money. The policies are strict in case there is a need to reduce the cash in the nation. Reduction of funds causes the businesses not to increase their business and thus retrenchment of workers hence unemployment would arise. A monetary policy that is not rigid would imply that the rate of return on loans is low, this would encourage borrowing as the Federal store plan to add more cash to the economy leading to expansion of businesses due to the presence of capital and employment is created. The central depository is the body that manipulates the Federal Reserve to ensure that a balance is struck. The extreme of each scenario is not favorable to the country’s economy and this is evident in the effects felt during the fluctuations. The central depository is thus a critical body of each nation and must be watched closely and keenly to ensure any deviation from balance in the economy to be detected and adjusted in time.
References
Reden, S. (2010). Money in classical antiquity. New York: Cambridge University Press.
Gitman, L. J., & McDaniel, C. D. (2009). The future of business: The essentials. Mason, OH: South-Western Cenage Learning.
Hafer, R. W. (2005). The Federal Reserve System: An encyclopedia. Westport (Conn.: Greenwood Press.
