Question

News reports indicate that the Fed plans to announce its third increase in the discount rate in the past five months. Additional reports suggest that the Fed may also increase the reserve requirement in the near future. Apparently the Fed perceives the number one problem facing the economy is:

Answer 1

Answer: Inflation

Explanation: Inflation is the rate at which the monetary value of goods and services increase. The main duty of the Federal reserve,also called "the Fed" is to control inflation while avoiding recession. The Fed does this by adopting monetary policies according to the situation.

When the discount rate is increased, it means the interest rate is higher and this contracts or reduces the money supply in commercial banks which in turn reduces inflation by slowing down economic growth. This reduces the pressure on the price , inflation is reduced and there's equilibrium.

Increasing the reserve requirement also curbs inflation as this also entails taking money out of the supply and increasing the cost of credit, slowing down the economy and reducing inflation.