Question

4. You have the assignment of making a recommendation to the Chairman of the Fed during a period of persistent, high inflation. What could you do to restore stable prices?

Answer 1

The following recommendations-

1. Government spending to be reduced - schemes and projects should be postponed and only spending on those which are productive in nature. Reduction in unproductive channels can reduce the inflationary pressure

2. Increased selling of bonds-This would reduce the money supply hence reducing the inflation as the money given to purchase the bond will be kept in the treasury and not circulated.

3. As a monetary policy, the government should increase the interest rate, as that will lead to a fall in demand and hence reduction in inflation  

The target of the recommendation is predominantly to reduce the money supply as money supply control is basically inflation control.