Question

Write a response to the following in a minimum of 500 words:

Analyze how changes in the Federal Reserve’s monetary policy affect at least 2 of the 4 components of GDP (consumption, investment, government spending, net exports).

Justify your answer to the following question: Have the Federal Reserve’s counter cyclical monetary policies been effective in moderating business cycle swings?

Answer 1

Monetary policy defined as the action taken by central bank to control money supply to achieve macroeconomic goal to get sustainable economic growth.When economy is growing, inflation is moving highly,so central bank take steps to support economy raising short term interest,which give tight monetary policy.Monetary policy have direct and indirect impact on investment.Direct impact is about the level and direction of interest rate.Indirect effect is expectation about inflation.

Monetary policy cause increase in prize and reduce the interest rate.Lower interest rate lead to high capital investment.Lower exchange rate increases the exports and decrease import and balance the trade.

Federal Reserve's counter cyclical monetary policy is defined as an economic policy is work against cyclical tendencies in the economy.When it is upswing,it support and cool the economy.When it is down,it stimulate the economy.

Change in the bussiness cycle,random fluctuations can cause economic growth.Business cycle is defined as regular cyclical pattern of economic expansions and recessions.Capital investment is the cyclical component of economic output.Government can temper expansions and recessions through the use of monetary and fiscal policy.