The Federal Bank

The Federal Bank In times of a struggling economic situation, determine the key steps that the Federal Reserve should take to help stabilize the economy. Next, explain how your proposed steps will affect money supply, interest rates, inflation rate, aggregate demand, and output. Provide support for your response.

The Federal Bank can make changes in its monetary policies in order to have a control over the money supply so that people can spend accordingly. Thereby, it can also control the inflation rate in the country. The successful Expansionary monetary policy involves reduction of the interest rates and reduction in the reserve requirements (which are the causes) so that business firms can invest more (which are the effects). It will be represented by the rightward shift of the LM curve due to rise in the money supply leading to fall in the interest rate. It will also lead to reduction in savings by the households.

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