Module 4 Discussion

The Federal Reserve created the federal funds rate as a tool for managing monetary policy in the United States. This rate is "the short-term interest rate that banks charge one another for loans" (Mankiw, 2021). Federal funds are easily influenced by changes in interest rates, which in turn have an impact on borrowing costs and financial conditions. A decline in interest rates would mean lower borrowing costs for both individuals and companies. Theoretically, low borrowing rates encourage consumers to spend more while enabling firms to invest in better machinery and hire more people. Businesses are likely to increase hiring when there is a shortage of labor in the market to meet demand. The unemployment rate falls as a result of increasing employment. The cost of borrowing money increases when the inverse effect of rising interest rates takes place. Customers are compelled to spend less and save more as a result. Employers will be forced to lay off workers as a result of high-interest rates since people will be less willing to spend money on goods and services under these unfavorable conditions. The unemployment rate will probably rise as a result. Inflation can equally be affected by the changes to the federal funds rate. Inflation is the increase in the overall level of prices in the economy (Mankiw, 2021). Typically, the price of inflation is correlated with the expansion of the money supply. Unfavorable impacts of inflation might arise from a big increase in GDP when too much money is injected into the system. This prompts the Federal Reserve to intervene by increasing the federal funds rate, which raises the cost of borrowing money. In essence, by exchanging cash for bonds, the government is reducing the amount of money in circulation. References: MindTap - Cengage Learning . (n.d.-c). deploymentId=5981412353502464190243042516&eISBN=9780357133576&id=184101 2717&snapshotId=3554807&
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