Describe the problem and impact that inflation has on the...

• Describe the problem and impact that inflation has on the economy as a whole and the various economic entities (individuals, firms, financial institutions, etc.). • Identify and summarize three specific monetary policy tools that the Fed can use to combat inflation. o Explain how each tool may reduce inflation and how it impacts employment and growth.

Transcript

00:02 In a situation of massive inflation, the primary goal of the federal reserve would be to combat the rising prices and stabilize the economy.

00:11 So to achieve this, the federal reserve would implement a tight or contradictory monetary policy.

00:21 So what would it be? federal reserve, the monetary policy would be the open market operation.

00:47 Open market operation.

00:53 So the fed would sell government securities in the open market.

00:58 By doing so, it reduces the money supply in the economy as individuals and institutions purchase these securities with their cash, leading to a decrease in the total amount of money available for spending and lending.

01:13 So the impact would be money supply.

01:19 Impact would be on the money supply.

01:26 Decreases as the money is taken out of the circulation.

01:30 So money supply will decrease.

01:34 And second is interest rate.

01:39 The interest rates will increase due to the reduced money supply.

01:47 Then aggregate spending.

01:56 Declines as higher interest rate discourage borrowing and spending.

02:00 Declines as higher interest rate discourage borrowing and spending.

02:06 Then is real gdp.

02:13 It may decrease as reduced spending.

02:16 It may decrease as reduced spending and investment impact economic activity.