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The Federal Reserve controls the money supply through monetary
policy actions.
How do changes to the federal funds rate affect the unemployment
rate? Explain by using information from the textbook. (Mankiw, N. G.
(2021). Principles of Economics (9th Ed.). Cengage Learning.
How do changes to the federal funds rate affect the inflation rate?
Explain the relationship using information from the textbook.
In your responses, comment on at least three posts from your peers.
Compare and contrast your thoughts about monetary policies.
Research current levels of the federal funds rate, inflation, and
unemployment and make recommendations on monetary policy
actions that would help maintain economic stability.
PEER # 1
The Federal Fund rate usually is on an overnight basis; banks and other
depository institutions lend money to one another at the Federal Funds
rate. To comply with the law, banks must hold a certain percentage of
their customers’ money on reserve, where they do not earn interest.
Therefore, to maintain the proper level of reserves, banks lend money
back and forth, so they stay close to the reserve limit. The federal
funds rate controls inflation and other interest rates, just as the federal
discount rate is. Borrowing becomes more expensive when the rate is
raised. Keeping inflation at bay is made more accessible by reducing
the available money supply. Interest rates on short-term loans decrease
when the rate is lowered.
If the federal rate changes, the unemployment rate will be affected
dramatically. Monetary policy involves Fed decisions regarding the
money supply. During the Federal Open Market Committee session,
monetary policy is decided by the Federal Reserve. Every six weeks, the
FOMC meets in Washington, D.C., to discuss the economy and change
monetary policy as necessary. (Mankiw, N. G., 2021.) Increasing the rate
makes banks reluctant to borrow money since borrowing costs rise. As
banks borrow less, they have less money, resulting in fewer loans.
Businesses and consumers borrow from banks at higher interest rates
when money is less available for lending. An increase in unemployment
is expected when companies and consumers reduce their expenditures
in response to a higher interest rate. In the case of too high-interest
rates, consumers or businesses are not interested in borrowing,
resulting in less market investment and a decline in business
confidence. In times of decreasing investment, the need for labor also
decreases. This cause-and-effect scenario will lead to a higher
unemployment rate in the market.
Like other central banks, the Federal Reserve was formed to promote
economic success and social welfare. They are responsible for
monitoring price movements to prevent rapid price increases or
decreases. The monetary policy is adjusted to lower interest rates when
prices are too high to slow the flow of money. Money supply increases
when demand exceeds supply, which leads to higher prices because
the output of those products and services remains the same. (Mankiw,
N.G., 2021). The Federal Reserve considers 2% inflation appropriate as
measured by a price index for personal consumption expenditures.
Inflation is controlled by manipulating interest rates by the Federal
Reserve. A Federal Reserve rate increase is used when inflation is too
high to slow the economy and reduce inflation. To stimulate the
economy and increase inflation, the Federal Reserve lowers interest
rates when inflation is low.
“In the United States, the authority to set interest rates is divided
between the Board of Governors of the Federal Reserve (Board) and the
Federal Open Market Committee (FOMC). The Board decides on
changes in discount rates after recommendations submitted by one or
more of the regional Federal Reserve Banks. The FOMC decides on
open market operations, including the desired levels of central bank
money or the desired federal funds market rate. Fed policymakers
continued to anticipate that ongoing increases in the fed funds rate
would be appropriate and backed a 50 or 75 basis points hike in July,
FOMC minutes from the June meeting showed. Officials also noted that
the US economic outlook warranted moving to a restrictive stance of
policy, and they recognized the possibility that an even more restrictive
stance could be appropriate if elevated inflation pressures were to
persist. At the same time, they noted that policy firming could slow
economic growth for a time. Still, they saw the return of inflation to 2%
as critical to achieving maximum employment on a sustained basis. The
Federal Reserve increased the fund’s rate by 75bps to 1.5%-1.75%
during its June 2022 meeting, instead of 50bps initially expected”.
(Trading Economics)
PEER # 2
There are a few ways that the federal reserve controls money supply
through monetary policies. The fed will use policy tools to influence
availability and cost of credit. To give an example of how federal funds
rates affect unemployment rates, we must examine what would happen
if rates are increased. If federal fund rates increases, banks are less
likely to borrow money at higher interest rates from other banks
because it will cost too much to actually borrow these funds. Therefore,
banks will not have as much money to lend to consumers. Additionally,
if banks have less money to lend, the banks will charge higher rates for
the money it does have. As a result of the higher rates, business are
less likely to invest more in the market thus decreasing the labor
demand. As the labor demand decreases, the unemployment rate will
increase as a result of the increased rates. On the other hand, if the
federal funds rate was to be reduced, unemployment rates will
decrease as businesses will have ability to invest more money in the
market and/or people.
The primary focus of the federal reserve is to promote the economic
success of the Country and social welfare throughout. While being
formed, the Federal Reserve’s primary responsibility is to maintain
stability of prices, which means that prices, generally should not
increase or decrease rapidly in short periods of time. Historically, a 2%
inflation rate has been considered acceptable year over year. Typically
this is measured by the price index for consumers. By manipulating
interest rates, the Federal Reserve will increase interest rates to help
fight inflation that is too high, or lower interest rates to help stimulate
the economy by encouraging more spending. We are experiencing this
exact rate hike at the moment where inflation has skyrocketed due to
various reasons, and the Federal Reserve is hiking up the rates to help
combat this inflation and slow the economy. If you were to ask the
Biden administration for the cause of the current inflation, he will most
likely pin the blame on Putin or Trump. Additionally, we are seeing this
in the housing market where houses were selling, and current are still
selling, for way over asking or reasonable prices. The increase in
interest rates are going to deter house purchases and help stabilize the
prices of homes within the next few years, but it will not be an
immediate deterrent.
PEER # 3
Federal funds rate refers to the target interest rate that banks charge
other institutions or businesses for lending excess cash to them. The
webtext states (Mankiw, 2022), “the actual federal funds rate is set by
supply and demand in the market for loans among banks, the Fed can
use open-market operations to influence that market”. So, changes to
the federal funds rate does affect the unemployment. After watching
the Monetary Policy and the Fed- EconMovies #9: Despicable Me video
(Clifford, 2015) it mentioned that when interest rates are really high
then less people and businesses aren’t going to take out loans. If
businesses can afford to pay these loans with extremely high interest
rate, they will eventually go out of business and cause a recession and
an increase in the unemployment rate.
The federal reserve is responsible for making adjustments to make
sure that prices do not rise or fall too quickly. The webtext states
(Mankiw, 2022), “If the supply of money in the market is too high, it
increases demand, thus raising prices because the output of those
products and services do not change.” This means that when inflation is
too high, the Federal Reserve typically raises interest rates to slow the
economy and bring inflation down and when inflation is too low, the
Federal Reserve lowers interest rates.

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