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Surname 1 Student’s Name: Professor’s name: Course: Date: Monetary Policy The economy of the United States is currently running below capacity. As a result, the Federal Reserve should use the monetary policy, that is, buy bonds on the open market so as to stabilize the economy. Buying of the bonds will impact the interest rates by lowering it in order to rein on the aggregate demands for goods and services. Through raising the reserves that banks hold, they will have extra cash available to loan and can reduce their interest rates. At interest rates that are lower, consumers plus businesses will be more eager to borrow to make procurements, and ultimate demand will rise. This policy will be effective in lowering the long-term interest rates. The lower interest rates will make it cheaper to borrow. As such, this will tend to promote spending plus investment, leading to higher aggregate demand as well as economic growth.
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