What is the relationship between the federal funds rate and inflation? Does this relation change in recessions versus expansions? Why do you think there is or isn't any relationship between these variables? Please explain with examples thank you.
Answer - When the federal funds rate is decreased , banks are able to lend more at lower rates . This leads to rise in supply of money in the economy. This leds to inflation. Hence when federal funds rate decreases , inflation increases and vice a versa. There is direct relation between the federal funds rate and the recession unlike inverse relation of inflation and funds rate.
In recession of 2007 , the federal reserve lowered the federal funds rate in order to finish the recession in the economy and increase the demand which proves the relation between the recession and federal funds rate.
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