Question

Respond to the following in a minimum of 175 words: Discuss how changes in the Federal Reserve’s monetary policy affect at least 1 of the 4 components of GDP (consumption, investment, government spending, net exports). Have the Federal Reserve’s countercyclical monetary policies been effective in moderating business cycle swings? Justify your response.

Answer 1

Gross domestic product (GDP) refers to the measurement of national income as it calculates the total output produced within a nation in an accounting year.
Monetary policy refers to the policy that is used to stabilize the economic factors such as aggregate demand, output level, price level, and so on, by making changes in the money supply.
Any change in monetary policy will affect the components of GDP. For example; the Fed implemented an expansionary monetary policy due to which money supply increases in the economy. Increase in money supply will increase the money holding by the people. As a result, people will be encouraged to increase the consumption of products and services because they have more money to spend on consumption.
Countercyclical monetary policy is the policy under which the Fed make changes in the money supply that is opposite to the existing business cycle swing. During the slowdown/ downswing, it improves or stimulates the economy by using expansionary monetary policy. And, during a boom/upswing, a contractionary monetary policy will help to cool down the market.
Therefore, The Federal Reserve’s countercyclical monetary policies have been effective in moderating the business cycle swing.