Economics

Economics

According to the Federal Reserve’s Federal Open Market Committee (2011), the Federal Reserve “controls the three tools of monetary policy—open market operations,

the discount rate, and the reserve requirements.”

It goes on to say that using these three tools, the Federal Reserve influences the demand for and supply of balances that depository institutions hold at the

Federal Reserve Banks, and in this way, it alters the federal funds rate. The federal funds rate is the interest rate at which depository institutions lend balances at

the Federal Reserve to other depository institutions overnight.

Discuss the impact if the Fed chose to raise or lower the federal funds rate, as it relates to the chain of events that affect the following:

Other short-term interest rates
Foreign exchange rates
Long-term interest rates
The amount of money and credit in the system
Employment
Output
Average Prices of goods and services (i.e., inflation)
Investment

Using your understanding of the financial system, the demand for money, banking and the money supply, the stock market, interest and spending, interest and

investment, how money moves, and how monetary policy affects aggregate supply and demand and inflation:

Demonstrate your understanding of how the Fed influences the money supply (M1) and interest rates in a graph.
Do you think we are in a liquidity trap today? Why or why not?
What are some additional tools the Fed can consider to influence the economy beyond these three tools?

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