Economic Impact on Business Operations
Some say money is the root of all evil. Those who have it do not know what to do with it and those who want it dream of having it. The creation of money has always been somewhat confusing. The Federal Reserve uses various tools to control the money supply. These tools influence the money supply and in turn affect macroeconomic factors. To better understand the purpose and structure of the Federal Reserve we writing expectations, all instances first have to understand how money is created and which combinations of monetary policy best achieves a balance between economic growth, low inflation, and a reasonable rate of unemployment.
Prior to the creation of money, society would use the barter system to obtain everyday necessities. A prime example of this would be when a farmer harvested his various produce, collected eggs his chickens laid, raised cows for their milk, and pigs for meat. He would take his inventory to town and obtain the things he needed by exchanging his goods for horses, food, or clothing. As time passed gold was discovered and was considered as a form of money where it could be exchanged for the everyday necessities of life. Each time a purchase was made, the gold had to be weighed and have a value placed on it. This became time consuming so a goldsmith would hold the gold and issue receipts for the gold that could be exchanged for goods and services from the different businesses in town.
When someone borrowed gold from the goldsmith, instead of taking the loan in the form of gold, the person accepted the paper IOUs of the goldsmith. Since people accepted these paper IOUs as money, this transaction increased the amount of money in circulation. When the goldsmiths began to create money, their careers as bankers began. (J. A. Ferris, 1969)
Monetary policy is the process by which governments and central banks manipulate the quantity of money in the economy to achieve certain macroeconomic and...