Question

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Answer 1

The Federal Reserve (the Fed) is the central banking system of the United States. One of it functions is to manage the nation's money supply through monetary policy in order to maintain the stability of the financial system and the economy.

The Fed had the power to increase the money supply. If the Fed believes that the economy is operating well below its potential level of output, the money supply is increased in order to stimulate the output and employment. Output is the quantity of services and goods produced.

To increase the money supply means that people will have more or excess money to spend. Consumption will increase, people will demand more goods and services. Some may want to deposit the excess money in banks making the bank's excess reserves richer ( banks will own more money). If the banks own more money, they are willing to lend more. Banks will lower interests rates to motivate borrowing.

As the result of increased consumption and investment ( more money available, lower interests rates ) the country's GDP will increase. GDP is the market value of all the goods and services produced in the USA during a specific time.

Answer 2

1. A decrease in interest rates.
2. lower rates makes borrowing less costly to consumers,businesses and government,so consumption increases.
3. Increased money supply stimulates output and employment.
4. Fed can achieve this by purchasing US government securities
5. banks are able to borrow at lower interest rates from the Fed.
6. Increase in the money supply is mirrored by an equal increase in nominal output or GDP.