Question

23. Fed Raises Rates As Job Gains, Firming Inflation Stoke Confidence The US. Wed Federal Reserve raised interest rates on nesday. The rate rise was the second in three months. This second rise comes in an economy that is growing faster and creating jobs at a more rapid pace. These gains are accompanied by a ris- ing inflation rate. Source: Reuters, March 15, 2017 a. Describe the process by which the Fed's action reported in the news clip flows through the economy that prompted the Fed to take the c. Draw a graph to illustrate the Fed's action and economy b. Draw a graph to illustrate the state of the action described in the news clip. its effect.

Answer 1

The process of Increasing Fed Rates is termed under contractionary monetary policy aimed to control an inflated economy. Since economy has seen consistent rise in employment which has caused economy to operate and hence good availability of money supply is seen in market and hence aggregate demand had risen which further pushed prices up. Hence to curb inflation Fed decided to adopt contractionary monetary policy. \r\n To curl inflation, the Fed decided to increase interest rates so that credit availability and supply of money gets slumped and hence aggregate demand falls. This causes decrease in consumption and hence prices fall substantially causing inflation to drop. This also results in impact on full employment which reduces in economy. CONTRACTION MONETRY POLICY E_0 = Economy At initial Equilibrium E_1 = Economy At short Run Equilibrium