Banking
Economics
US Government

The Federal Reserve will tend to tighten monetary policy when?

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Answer

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Wiki User
08/08/2011

If the Fed believes inflation is high or is expected to increase in the future, it will contract the money supply. It will do this by selling securities which will cause bond prices to fall and yields to rise. With higher rates, consumers and businesses will be less willing to take on debt and lending will decrease, causing the money supply to fall. This will alleviate inflationary pressures.