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GENERAL BUSINESS COURSE QUESTION:

Joe and Jill were talking about the role played by the FederalReserve System in the United States. Joe seemed to be quite wellinformed about the functions and activities of our central bank.\"You see, Jill, the Fed is the main guardian of our nation'seconomic stability,\" Joe declared. \"In America, we don't wantinflation and we don't want recession. To stretch the situationjust a bit, we are frightened, absolutely terrified, by thoughts ofhyperinflation and depression. So, the Fed maintains the right toalter the situation and protect us from these two monsters. And youask, how they do that? The answer is the discount rate. That is thedevice that the Federal Reserve System uses to keep us safe.\"

Jill was enjoying listening to her friend explain it all. Joecontinued, \"Now the discount rate is the interest rate that thetwelve Federal Reserve Banks around the country charge their memberbanks on a loan. So, when the discount rate goes up, all interestrates tend to go up. And, happy to say, when interest rates go upall over America, this tends to slow down any inflationarytendencies.\" Jill asked, \"Does the Fed have other tools forstopping inflation?\" \"No,\" said Joe.

2) Joe probably can't answer this question, but youcan. What happens in the Fed's open marketoperations?