Question: Explain the links between changes in the nation's money supply, the interest rate, investment spending, aggregate demand, real GDP, and the price level. Suppose that

  1. Explain the links between changes in the nation's money supply, the interest rate, investment spending, aggregate demand, real GDP, and the price level.
  2. Suppose that you are a member of the Board of Governors of the Federal Reserve System. The economy is experiencing a sharp rise in the inflation rate.
  3. What change in the federal funds rate would you recommend?
  4. How would your recommended change get accomplished?
  5. What impact would the actions have on the lending ability of the banking system, the real interest rate, investment spending, aggregate demand, and inflation?
  6. What is the basic objective of monetary policy?
  7. What are the major strengths of monetary policy?
  8. Why is monetary policy easier to conduct than fiscal policy?
  9. Distinguish between the federal funds rate and the prime interest rate.
  10. Why is one higher than the other?
  11. Why do changes in the two rates closely track one another?

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