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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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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The Fed can slow this growth by tightening the money supply. That's the total amount of credit allowed into the market. The Fed's actions reduce the liquidity in the financial system, making it becomes more expensive to get loans. It slows economic growth and demand, which puts downward pressure on prices.
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