FINC 310 - Finance Project - Colorado Tech - 527 - 16094

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FINC 310 - Finance Project - Colorado Tech - 527

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The Federal Reserve operates through monetary policy to stabilize the economy and achieve its macroeconomic objectives. This is done by altering interest rates or controlling the money supply through sale or purchase of securities etc or increasing or reducing reserve requirements. With the changes in interest rates, cost of borrowing money is altered, eventually changing loans available, households’ wealth and exchange rates. For example, if expansionary monetary policy is used by the Federal Reserve, this means that interest rates are being lowered or securities are being bought by the Federal Reserve thus increasing money supply and decreasing cost of borrowing, which increases spending of people. Aggregate demand increases as investment and consumption spending is going up, also lower interest rate depreciates the local currency, increasing exports of the country and increased imported inflation. Increase in aggregate demand increases output and GDP goes up, also to increase production employment level is also increased in the short run. However, with an increase in aggregate demand, prices and wages increase and wage-price spiral starts, as increased consumption, increases prices of goods as output does not expand as the capacity is not enough, therefore, prices increase and output does not increase so much in the long run and there is trade-off between inflation and employment in the long run. Therefore, at periods of high inflation, interest rates are increased. Also, speculations an consumer expectations further worsen the situation during expansionary monetary policy. As a result of multi