Question

If you were a member of the Federal Reserve board of​ governors, and you saw inflation was beginning to careen out of​ control, which of the following actions would you MOST likely​ recommend?

A.

Sell U.S. government bonds in the open market.

B.

Implement fiscal policy.

C.

Lower the reserve requirement.

D.

Lower the discount rate.

E.

Buy U.S. government bonds in open market operations.

Answer 1

To control inflation Federal funds rate should be increased and which will contract the money supply. It can be done by conducting open market sell of government securities, bonds to banks and public in exchange for money. This will decrease the money supply in the economy and therefore public will have less money to buy goods and services. As a result aggregate demand will decrease, shifting the AD curve leftward and controlling the inflation by decreasing the price level.

Answer: option A