ECOCB535_Comp2_Mod3_Reflection.doc Comp 2/Module 3 - Reflection University of Phoenix ECOCB/535: The Digital Economy Comp 2/Module 3 “ Reflection The Federal Reserve consists of twelve federal banks throughout the
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ECOCB535_Comp2_Mod3_Reflection.doc Comp 2/Module 3 - Reflection University of Phoenix ECOCB/535: The Digital Economy Comp 2/Module 3 “ Reflection The Federal Reserve consists of twelve federal banks throughout the United States that directly and indirectly affect the four components of GDP through the implementation of monetary policy. Monetary policy utilizes four main tools to affect this change. The tools are open market operations, the reserve ratio, the discount rate, and interest on reserves. Interest on reserve is a recent addition to this toolset since 2008 and did not exist prior. Two of the components of GDP most closely related to the general public are investment and consumption. Both are large determinants in the overall health of the US economy and efficiency of monetary policy. The application of the Federal Reserves tools and subsequent effect on the supply of money is how it affects GDP (McConnell et al., 2018). Investment Monetary policy directly affects interest rates which determines the favorability of lending. The Federal Reserve adjusts the discount rate that commercial banks borrow money and that influences the interest rates for lending to businesses and the public. Reducing interest rates makes lending much more favorable and encourages investment. Investment decisions are often based on the cost of financing which must be low enough to be profitable and minimize risk (McConnell et al., 2018). For example, companies often rely on financing to make capital investments. Thes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . .. .. . . . . . . . . . . . . . . . . . .. . . . .
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