1) Federal Reserve Bank (FED) lowered the target for federal funds rate from 5.25% in June 2006 to 0-.25% in December 2008, and the target has remained at this level since then. Discount rate (i.e., primary credit rate) declined from 6.25% in June 2006 to .75 % in February 2010, and it has remained at this level ever since. FED in June 2006 was deeply concerned that housing bubble burst would have a devastating effect on the economy.

A) Although Fed cannot exert direct control over the federal funds rate, it can indirectly influence the level of federal funds rate by manipulating three tools of monetary policy. Explain how Fed can decrease the federal funds rate via these three instruments.

B) Also predict and explain the effects of such policy on the U.S. interest rates (both short-term and long-term), consumption spending, business spending, net export, aggregate output (GDP) and inflation rate.