You are concerned about a potential increase in interest rates, which would reduce the demand for your firms product, significantly negatively impacted sales and profits. The FED is scheduled to meet in one week to assess economic conditions and set monetary policy for the next quarter. Economic growth has been high (GDP at 5% growth for 5 quarters), but inflation has also increased from a level of 3% that had persisted for 6 quarters to 5% in the most recent quarter. The level of unemployment has been at an historic low for two years (8 quarters). With past policy, the FED has been maintaining slow and steady growth in the money supply of about 3%; while keeping the Fed Funds rate targeted in a range of +/- 1% around a mean of 3%.

a. Is the FED likely to adjust monetary policy? How? What process/tools will they use if they were to change?

b. Recently the FED has allowed the money supply to expand beyond the log-term target range. How does this information affect your expectations concerning the FEDs next monetary policy?

c. Some have suggested that if the FED raises just the discount rate, the growth in money supply will slow; changes in Open Market Operations are not needed. Do you agree with this?

d. Comment on the following. Some have noticed that the Fed Funds rate is more volatile when the FED is concerned about inflation; and that the money supply is more volatile when employment is a concern. Do you agree?

e. The FED is notified that the Treasury must borrow more than had been expected during the next quarter. What impact would this information have on your answer to how the FED will adjust monetary policy.