Discuss the impact if the Fed chose to raise or lower the federal funds rate, as it relates to the chain of events that affect the following:
• Other short-term interest rates
• Foreign exchange rates
• Long-term interest rates
• The amount of money and credit in the system
• Average Prices of goods and services (i.e., inflation)
Using your understanding of the financial system, the demand for money, banking and the money supply, the stock market, interest and spending, interest and investment, how money moves, and how monetary policy affects aggregate supply and demand and inflation:
• Demonstrate your understanding of how the Fed influences the money supply (M1) and interest rates in a graph.
• Do you think we are in a liquidity trap today? Why or why not?
• What are some additional tools the Fed can consider to influence the economy beyond these three tools?