Answer to Question #60044 in Macroeconomics for Tristan Thompson

Question

. Suppose the Fed’s target for the federal funds rate moves from 0.5% (current value) to
2%. Using the appropriate graphs carefully explain:
(a) How can the Fed attain such increase in the FFR? HINT: you have to use the graph for the
(interbank) market of reserves
(b) What is the impact of such change on total spending in the economy? HINT: you have to use the
graph with the total expenditure and the 45 degree line.
(c) What is the impact on equilibrium output Y and the price P? HINT: you have to use the AD-AS
graph.

Answer 1

Suppose the Fed's target for the federal funds rate moves from 0.5% to 2%.
(a) Such increase in the FFR will decrease total reserves, but the overall business activity will increase.
(b) The impact of such change on total spending in the economy will be positive, so aggregate expenditure curve will shift to the right.
(c) The impact on equilibrium output Y and the price P will be positive too, so the equilibrium price level and equilibrium GDP level will increase.