Changes in the federal funds rate trigger a chain of events that affect the following:
Other short-term interest rates
Foreign exchange rates
Long-term interest rates
The amount of money and credit in the system
Prices of goods and services (i.e., inflation)
Using your understanding of the financial system, the demand for money, banking and the money supply, the stock market, interest and spending, interest and investment, how money moves, and how monetary policy affects aggregate supply and demand and inflation, explain exactly how a change in the federal funds rate can trigger all these reactions. Use at least 4 graphs. Do you think we are in a liquidity trap today? Why or why not?
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