Describe the channels by which monetary policy ripples through the economy and explain how each channel operates.
Suppose the Fed changes the federal funds rate target.
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Part 1
When the Fed changes the federal funds rate target, it makes an open market
▼
sale
purchase
.
Other short-term interest rates
▼
rise
fall
.
The quantity of money and the supply of loanable funds
▼
increase
decrease
.
Part 2
The long-term real interest rate
▼
falls
rises
.
The
▼
lower
higher
real interest rate
▼
increases
decreases
consumption expenditure and investment.
Part 3
Aggregate demand
▼
decreases
increases
, which
▼
decreases
increases
real GDP and the price level, relative to what they would have been.
Real GDP growth and inflation
▼
slow down
speed up