Suppose the federal reserve wants to stop inflation from growing


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Suppose the Federal Reserve wants to stop inflation from growing. In three to four sentences, explain how its actions slow economic growth.

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Answer:

Raising interest rates makes money "rare." Selling bonds decrease the reserves of banks, which decreases their lending capabilities (again, making money rarer). ... If it changes, the money multiplier changes. In other words, the Fed would raise the reserve ratio in order to fight inflation.


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