As a manager of a firm, you are concerned about a potential increase in interest rates, which would reduce the demand for your firm's products. The Fed is scheduled to meet in one week to assess the economic conditions and set monetary policy. Economic growth has been high, but inflation has also increased from 3 percent to 5 percent (annualized) over the last four months. The level of unemployment is so low so that it cannot possibly go much lower.

1. Given the situation, is the Fed likely to adjust monetary policy? If so, how?
2. Recently, the Fed has allowed the money supply to expand beyond its long-term target range. Does this affect your expectation of what the Fed will decide at its upcoming meeting?
3. Suppose that the Fed has just learned that the Treasury will need to borrow a larger amount of funds than originally expected. Explain how this information may affect the degree to which the Fed changes the monetary policy.