The Fed has a dual mandate: (a) price stability (low inflation) and (b) maximum employment (minimal unemployment). To achieve these goals, the Federal Reserve conducts monetary policy using different tools. These include Open Market Operations (OMO), changing reserve requirements, and changing the discount rate.In this section, we focus on OMOs: The Fed purchases and sells bonds to change the money supply. The economic outcomes of monetary policy can be shown through their impact on interest rates and on aggregate demand. In particular,an expansionary monetary policy (the federal funds rate approaches zero) was implemented as a response to the coronavirus pandemic (see the article below on"COVID-19's Effects on the Economy and the Fed's Response"). The FED increases (expands) the money supply to reduce interest rates. This can be achieved by shifting the money supply curve (see the lecture note). Typically, when interest rates are low, firms borrow more money to increase investment into their businesses and hire more workers. Low interest rates also promote higher consumption. As a result, aggregate demand for goods and services is affected; this is reflected in observed price level changes and in real GDP.

Explain how anexpansionary monetary policyworks and illustrate its impact on the economy.

Question 1.Show this monetary policy by illustrating the shift of money supply (MS) curve on a graph. How does the interest rate change at the new equilibrium point?

Question 2.How does the change in interest rate from the previous question affect aggregate demand (AD)?

1. Illustrate the shift of the AD curve with a graph.
2. How does the price level and real GDP change?

Question 3:Do you think that a monetary policy response to the coronavirus pandemic has been effective? Please give a short answer. You can refer to some of the online articles.

• use the link to respond to question 3

Federal Reserve: "COVID-19's Effects on the Economy and the Fed's Response"https://research.stlouisfed.org/publications/page1-econ/2020/08/10/covid-19s-effects-on-the-economy-and-the-feds-response