How Does The Federal Reserve Affect The Economy

The article touches upon the recent increase in interest rates that the new chairman of the American Federal Reserve has implemented on the American economy. An interest rate is the price of borrowing money. Consumers and investors borrow money from banks which they later must return, also known as the principal, in addition to the initial amount borrowed they pay a percentage of the principal, known as the interest rate. This is one of the ways that banks earn money. Central banks have two primary responsibilities: to regulate and oversee the nation’s commercial banks by making sure that banks have enough money in reserve to avoid bank runs and to conduct monetary policy which is increasing or decreasing the money supply to speed up or slow down the overall level of economic activity. The Federal Reserve, or the Fed, oversees Americas monetary policies, which is the use of interest rates through the supply of money in an economy, to manipulate or influence the aggregate demand. The aggregate demand, AD, is the total spending on goods and services in a given period of time at a given average price level. The AD consists of several components: Consumption, Investment, Government spending and Net exports (Exports – Imports). Changes to any of the factors in

This is known as a contractionary policy and is used to fight inflation. Inflation is a persistent increase in the average price level in an economy and is associated with many negative effects which is why central banks work hard to stall too aggressive inflation in the economy. Inflation is a sign of an overheated economy – which is consistent with the American economy which has had extremely low interest rates for very long to work its way out of a recession – which is why the drastic increase was not completely