Category: Economics

➤ How does the Fed influence interest rates?
The Fed influences short-term interest rates mainly through the FOMC’s federal funds rate target and open market operations. It buys or sells Treasury securities, adjusts the discount rate, and changes reserve requirements. These actions alter bank reserves, affect lending costs, shape credit conditions, and guide inflation and employment outcomes.

4. When can policy changes cause a permanent drop in LRAS?
Policy changes cause permanent LRAS drops when they reduce incentives for investment, innovation, or labor participation. Examples include heavy, persistent capital taxation, regulatory burdens that block new firms, nationalization of industries, or weakened property rights. These policies lower productivity and capital accumulation, shifting the economy’s potential output downward over the long term.