INSTRUCTOR DISCUSSION NOTES:
Threat of Inflation Remains Uncertain

1. How does the Open Market Committee change the money supply?

The Federal Open Market Committee, as the name implies, buys and sells securities on the open market to influence the money supply. If they sell securities the process takes reserves out of the banking system and reduces the availability of credit and increases the interest rate. If the committee buys securities it injects reserves into the banking system and makes credit more available and lowers the interest rate. Selling securities is know as tight money policy while buying securities is know as loose money policy.

2. Why is the Fed worried about increasing interest rates in the article?

The Federal Reserve officials are worried about implementing a current increase in the interest rate to fight inflation because there are signs that the economy may be slowing. As indicated above, it the Fed moves to increase rates credit availability will be reduced and it can have a contractionary affect on the macro economy. As interest rates rise businesses find investment projects that were profitable at the old interest rates are no longer profitable and investment spending decreases, potential job growth slows and the economy begins to contract.

Multiple Choice/True False Questions

1. When the Fed wants to increase interest rates they sell securities in the open market.
  1. True
  2. False
ANS . a

2. The Federal Open Market Committee controls the money supply to influence inflation.
  1. True
  2. False
ANS . a

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