It goes on to say that using 3 tools, Federal Reserve manipulates the demand for and supplies of balances those depository institutions holds at Federal Reserve Banks (FRB), moreover in this method, it alters the rates of federal funds. Federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.
Changes in the federal funds rate trigger a chain of events that affect the following:
Other short-term interest rates
Foreign exchange rates
Long-term interest rates
The amount of money and credit in the system
Employment
Output
Prices of goods and services (i.e., inflation)
Investment
Using your understanding of the financial system, the demand for money, banking and the money provide, interest and spending, the stock market, interest and investment, Elucidate how money shifts, and how monetary policy affects aggregate supply and demand and inflation, explain exactly how a change in the federal funds rate can trigger all responses. Utilize minimum 4 graphs. Do you think we are in a liquidity trap today? Why or why not?