Question

The Fed has recently conducted a number of policies aimed to lower interest rates. In fact, the federal funds rate, in an emergency decision, was decreased to a target range of 0- 0.25% and they are purchasing longer term securities in an attempt to lower other interest rates. Do you expect these changes to cause inflation at this time? Explain why/why not. You should explain what is happening to each component of AD in your answer

Answer 1

Fed is purchasing longer term securities: As Fed is purchasing longer term securities, they will give cash in the hands of public against these securites. Cash in hand of public will raise circulation of money in the economy which raises consumer willingness to pay for goods and raises consumption level.

Aggregate demand = Consumption + Investment + Government Spending + Exports - Imports

As consumption rises, aggregate demand rises with it due to its positive relationshion described above.

When aggregate demand rises and shifts the AD curve to its right while aggregate supply (AS) remains the same, it raises the level of price from P to P1 in the economy as well as raises output level from Y to Y1. So we can say that inflation will rise in the economy.

- - س AD لاح لا