Reference no: EM132294779

The Federal Reserve Bank uses a variety of tools to change the supply of money and interest rates. Although the Federal Reserve cannot affect income, output, or inflation directly it can implement policies that influence interest rates. In turn the changes in interest rates can influence real spending and output. One of those actions is to change the federal funds rate (referred to as the fed rate). This is the rate banks charge each other for loans of reserves in order to meet the minimum reserve requirements. It happens frequently that when the fed rate changes there are noticeable changes in the financial markets.

• Does a change in the fed funds rate really have an actual direct monetary influence on the markets or is it nothing more than a perception? Explain.

When making monetary policy changes decision makers are concerned with the macroeconomic goals of maintaining stable prices, full employment, and an economic growth rate that is sustainable. Two measurements are used to analyze the impacts on these goals:  aggregate demand (AD) and aggregate supply (AS). An AD curve is used to show how combinations of price level and income can result in a simultaneous equilibrium in real goods and money markets. An AS curve demonstrates the price level at which companies are willing to produce goods and services. 

• Explain how changes in monetary policies can affect one or both of these measurements (AD and AS).