To execute monetary policy, the Federal Reserve employs its policy instruments to influence the economy's availability and price of credit, influencing labor and inflation. The Federal Reserve's primary tool for implementing monetary policy is the federal funds rate (Fazzari, Morley & Panovska, 2015). Adjustments in the federal funds rate affect other interest rates, which would affect how much it costs for people and companies to take funds and the state of the economy. It takes advantage of its ability to alter the money supply to lower interest rates, reduce inflation, boost employment, and impact economic activity (Shapiro & Wilson, 2021). Open market operations, capital requirements, and the discount rate are the three methods the Federal Reserve System uses to control the money supply. When borrowing prices are reduced, people are more willing to invest money in goods and services. For instance, Pepsi Cola is better equipped to invest in real estate and facilities to expand its operations. Employment may also be impacted by the number of people that firms hire. Furthermore, better pay and other costs could emerge from the higher demand for goods and services, which would impact inflation.
Fiscal policy may involve "pump priming" the economy with funds by lowering taxes and raising spending by the government. The overall unemployment rate will decrease in the interim. Consumer demand for goods and services rises in Pepsi Cola due to more economic money and lower tax obligations (Gogas & Pragidis, 2015). As a result, businesses get a second wind and the cycle shifts from one of inactivity to activity. Nevertheless, if there are no controls in place, the rise in economic output could tip the scales too far and result in an oversupply of money on the market. This surplus of supply raises prices while devaluing the currency. As a result, inflation is higher than what is reasonable.
Mohseni, M., & Jouzaryan, F. (2016). Examining the effects of inflation and unemployment on economic growth in Iran (1996-2012). Procedia Economics and Finance, 36, 381-389.
Shapiro, A. H., & Wilson, D. (2021, January). Taking the fed at its word: A new approach to estimating central bank objectives using text analysis. Federal Reserve Bank of San Francisco.
Svensson, L. E. (2015). The possible unemployment cost of average inflation is below a credible target. American Economic Journal: Macroeconomics, 7(1), 258-96.