• The supply curve for Federal funds is somewhat unusual in that it is horizontal at the targeted Federal funds rate; whether the demand for Federal funds incresases or decreases, the Fed will use its open-market operations to increase/decrease the availiability of reserves and retain the desired FEderal fund rate.

• When the economy is facing recession and unemployment, the Fed will respond by initiating an expansionary monetary policy
• The Fed wishes to increase the money supply in order to lower interest rates and encourage new consumption and investment.
  
• This policy will lower the interest rate to bolster borrowing and spending, which will increase aggregate demand and expand real output.
• The Fed will announce a lower target for the Federal funds rate, and will in order to acheive that lower rate the Fed will use open-market operations to buy bonds from banks and the public
• The purchase of bonds increases the reserves in the banking system.
• Fed could also expand reserves by lowering the reserve requirement or lowering the discount rate to achieve the same result
• This is very rare
• The greater reserves in the banking system produce two results:
• The supply of Federal funds increases, lowering the Federal funds rate to the new targeted rate.
• A multiple expansion of the nation's money supply occurs.

- The Prime interest rate : benchmark interest rate used by banks as a reference point for a wide range of interest rates charged on loans to businesses and individuals

• higher than federal funds rate

• This policy will increase the interest rate in order to reduce borrowing and spending, which will curtail the expansion of aggregate demand and hold down price-level increases.
• The Fed's immediate step will be to announce a higher target for the federal fund rate.
• Through open-market operations, the Fed will sell bonds to the banks and the public and the sale of those bonds will absorb reserves in the banking system.
• Supply of Money then decreases and commercial banks make fewer loans to the public. The decrease in money supply increases the interest rate.