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In: Economics

without plagiarizing and in your own words explain; how in the U.S. the Federal Reserve (Fed)...

without plagiarizing and in your own words explain; how in the U.S. the Federal Reserve (Fed) uses monetary policy to manage aggregate demand (AD) in the economy. In your response you must discuss (name and describe) at least three tools the Fed uses, how each of those tools, though directional change, affect the money supply, interest rates, and AD (done through example).

Solutions

Expert Solution

The Federal Reserve attempts to coordinate between aggregate demand in the market and aggregate supply of currency through a monetary policy.
For this, steps are taken by the Federal Reserve under the Monetary Policy to control the money supply through open market operation, bank rate, liquid adjustment facility (LAF) and repo rate and repo reverse repo rate etc.
Under the open market operation, government bonds are purchased by the Fed to create more liquidity in the market so that the money supply can be increased in line with the demand in the market. Government bonds are sold in the market by the Fed through open market operations in the situation of inflation So that the liquidity in the market can be controlled.
The reduction in reserves held by banks through the Liquidity Adjustment Facility leads to the coordination between aggregate demand and supply of money.
Attempts are made to control the money supply in the market by increasing or decreasing the interest rate of loans offered by banks through the bank rate.
Thus through the aforesaid means various tools are used by the Fed through the Monetary Policy to establish the relationship between money supply and aggregate demand in the market.

Rahul Sunny answered 2 years ago
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