Discussion Question Response Macroeconomics

Discussion Question Response

The Federal Reserve controls the money supply through monetary policy actions.

In your initial post address the following:

· How do changes to the federal funds rate affect the unemployment rate? Explain by using information from the textbook.

· How do changes to the federal funds rate affect the inflation rate? Explain the relationship using information from the textbook.

This video will help to explain the Monetary Policy and the Fed: EconMovies #9: Despicable Me.

In your responses, comment on at least two posts from your peers. Compare and contrast your thoughts about monetary policies. Research current levels of the federal funds rate, inflation, and unemployment and make recommendations on monetary policy actions that would help maintain economic stability.

Jessica Pines - When the Federal Reserve enacts monetary policy, it can influence employment and inflation through policy tools to influence the cost of a loan or availability of funds. By making changes to the federal funds rate, it affects other interest rates that influence the borrowing costs for households and businesses. When interest rates go down, it's cheaper to borrow, so households are more willing to buy goods and services. Businesses are also in a better position to make purchases towards their business-like property and equipment. The same can be said on how the monetary policy affects inflation. When price levels rise, households have to pay more for their goods and services, causing them to hold on to their money rather than spend it. Businesses look to save money in multiple ways, laying off personnel, cutting costs, etc. A rise in the price level means a lower value of money because each dollar in your wallet now buys a smaller quantity of goods and services (Mankiw, 2021).

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Sean McGuire - The Federal Reserve is a central bank that is designed to oversee the banking system and regulate the quantity of money. They do this in many different ways. One way is they monitor federal funds rates. Federal funds are short term interest rates that a bank charges another bank for loans. This system is set by supply and demand; however, the Fed can still do things to help support the rates. They can do this by purchasing bonds in open makers operation which injects reserves into the making system. With the increase in reserves, fewer banks find themselves needing to borrow reserves to get reserve requirements. 

The federal fund rates are very important for the economy and can have major impact on unemployment rate. If the rates are increased to high less companies can/will borrow more money. This means they will have less money to invest into their company which means there could be a decrease in products which then means the possibility of companies letting people go. If a lot of companies are laying people off this will cause the employment rate to rise. On the flip side, if rates are kept low businesses can borrow money at a cheaper price which means they have more to invest which can increase productivity and keep the unemployment rate low. 

Another impact federal fund rates have on the economy is its effect on inflation. If the rates are too low, this means many people can borrow money. With the influx of borrowing means more spending because the consumers have more to spend. This can not only cause growth within the economy but can also increase inflation. This is why it is very important for the Fed to monitor these rates to ensure that they are kept at the best rate to ensure a healthy economy that doesn’t increase inflation but also doesn’t increase the unemployment rate. 

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