External environment - Role of the US Federal Reserve

Introduction

Since 1913, the US Federal Reserve Bank has had operational independence. This means that the Federal Reserve is responsible for setting interest rates to keep the level of inflation in the economy under control. Interest rates have therefore become the most important tool of short-term management of the economy, but they are no longer under direct government control. Why did this come about and what effect does it have? In this section we look in more detail at interest rates and how the US Federal Reserve sets them. There is a basic overview of interest rates, theories relating to them and a worksheet to see how well you have understood the issues.

• Explanation - how are interest rates set? What effect do they have on business?
• Theories - a more detailed look at theories relating to interest rates. What effect do changes in interest rates have on businesses? What effect will interest rates have on demand for goods and services? How do changes in interest rates impact on the rest of the economy?
• Worksheet - a worksheet looking at interest rates and the role of the US Federal Reserve to see how well you have understood the theories.