How does the Federal Reserve manipulate the interest rate? Describe the process step by step. List...

How does the Federal Reserve manipulate the interest rate? Describe the process step by step. List out your steps 1. 2. 3. Etc…

Expert Solution

The first tool used by Fed is the manipulation of interest rates. Put simply, this practice involves raising/ lowering interest rates to slow/ spur economic activity and control inflation.

LOWERING INTEREST RATES :-

1. By lowering interest rates, it becomes cheaper to borrow money.

2. It becomes less lucrative to save.

3. This encourages individuals and corporates to spend.

4. This further increases borrowings.

5. This leads to increase in total supply of money in the economy.

=> So, lowering interests means lowering savings, more money supply, more spendings, and higher overall economic activity.

RAISING INTEREST RATES :-

1. By raising interest rates, it becomes costlier to borrow.

2. This leads to more savings.

3. More savings means individuals consumption falls.

4. This further decreases borrowings.

5. This leads to decrease in total supply of money in the economy.

=> So, raising interests means raising savings, less money supply, less spendings and lower overall economic activity.

Rahul Sunny answered 6 months ago

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