15. When the Fed raises the federal funds rate, the consumption expenditure (inc

Question

15. When the Fed raises the federal funds rate, the consumption expenditure (increases/decreases) and investment (inc hat three components of aggregate expenditure are affected when there is a change in monetary policy? 16. W 17. When the economy is in a recession, the Fed can (lower/raise) the federal funds rate, which (increases/decreases) aggregate demand and (increases/decreases) real GDP. 18. To fight a recession, the Fed can (buying/selling) securities. (lower/raise) the federal funds rate by

Explanation / Answer

Answer 15 - The Fed raises the federal funds rate which facilitates depository institution to get easy fund from other depository institution for overnight. Now banks cannot lent for various purposes and. Consumption expenditure will decrease due unavailability of easy access to the funds. Investment will also decrease.

Answer 16 - The monetary policy affects whole economy. Monetary policy has strong effect on monetary variable of the economy. It affects quantity of money in the economy. Three components which are affect by monetary policy. Investment is heavily impacted by monetary policy as a result net exports are also affected and consumption also affected.

AE = C+I +G + (X-M)

Answer 17 - If economy is in recession then Fed can lower the federal funds rate which increases aggregate demand and increases real GDP in the economy. By this Federal Reserve bank fights to the recession.

Answer 18 - To fight a recession, the Fed can lower the federal funds rate by buying securities in the open market. Federal Reserve pump money into the economy. Quantity of money increases in the economy so that economic activities become accelerated.

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