Question

• Discuss how changes in the Federal Reserve’s monetary policy affect at least 1 of the 4 components of GDP (consumption, investment, government spending, net exports).
• Have the Federal Reserve’s countercyclical monetary policies been effective in moderating business cycle swings? Justify your response.

Answer 1

Answer: Federal bank is the central bank of an economy which use the monetary policy. When federal reserves of the central bank affect the rate of interest,investment and consumption etc.

When Fed use expansionary monetary policy, rate of interest will reduce with more availability of credit in the market. So people will start investing more money as they are getting the funds at cheaper rate. Thus their investments will increase and it affect the aggregate demand of the people. So their consumption spending will also increase .

On the other hand, when Fed use contractionary monetary policy it increase the interest rate which affect the investment and consumption of the people. As people are getting money on higher interest rate so they will start less investment and cost of borrowing will increase. They will not borrow much . It reduce the investment and purchasing power of the people. It also affect the consumption of the people.