Question

The chair of the Federal Reserve Bank spoke to the American public. The message she conveyed is that Fed economists are worried about inflation and believe the best course of action would be to slow the economy. Which of the following policies is the Fed most likely to pursue? Group of answer choices Restrict the money supply and increase interest rates Devalue the dollar on international currency exchanges Increase taxes Decrease interest rates

Answer 1

Answer:

Restrict the money supply and increase interest rates

Explanation:

When the economy is expanding at a fast pace, the Fed applies contractionary monetary polices to slow it down. Some of the tools available to the Fed to slow down growth includes an increase in the interest rates, increased reserve requirements, and open market purchases.

The Fed controls the market interest rate by adjusting the fed fund rate. An increase in interest rate makes borrowing expensive and unattractive to households and businesses. When firms and individuals are not borrowing, the result is a reduction in consumption and investment expenditure, thereby slowing down growth. Open market purchases reduce the money held by banks. Banks will, therefore, have few amounts available to lend out to customers.