Macroeconomics

 

Find a news article that discusses a change in monetary policy by the Federal Reserve Board. Often articles will say the “Fed” changed interest rates. Actually, the Fed has three main TOOLS that it can use. These tools will change the excess reserves in the banking system. This will encourage banks to make more or fewer loans which will affect the money supply. The change in the money supply will then cause a change in the interest rates.

Your article must mention WHICH TOOL the Fed has used to change the money supply, HOW they used that tool, what happened to EXCESS RESERVES (ER). and WHAT EFFECT it is expected to have on UE, IN, and EG.

You will use a series of THREE GRAPHS to show how the use of this tool by the Fed will affect the economy. (see monetary policy graphs below or in the yellow pages). You must carefully explain how the use of the FED TOOL will affect the excess reserves of banks and the money supply, and then discuss (by explaining the graphs) how this will affect interest rates, the amount of investment, and aggregate demand. THEN you must explain how this change in aggregate demand will affect UE, IN, and EG. Your AS/AD graph MUST show the full employment level of real GDP.

Do not summarize the article, but rather explain your graph.Let me say this again. Do not summarize the article. Only use the parts of the article that discuss the tool that the Fed is using and what is happening to UE, IN, and EG. You should be summarizing the textbook and class notes to EXPLAIN YOUR GRAPH.The purpose of this paper is to show me that you understand how to use the the three graph model to explain how monetary policy (tools) causes changes in unemployment (UE), inflation (IN), and economic growth (EG). You must properly explain the cause and effect in the correct order (see numbers on the graphs below).