Question

If the U.S. government is worried about high inflation. What policy you would recommend they use?

	a.	Sell dollars for foreign currency
	b.	Buy dollars with foreign currency
	c.	Lower interest rates
	d.	none of the above

Answer 1

To control inflation, government can either increase the interest rates which will make the lending rates increased and hence, the inflation over period of time will come down.

Additionally, inflation can also be reduced by decreasing the money supply, this can be done by Government buying the dollars and reducing the money supply in the market.

Hence, option b is correct - Buy dollars with foreign currency.

Option a is incorrect as selling dollars will increase the supply of money and hence, inflation will increase.

Lower interest rates will also increase the inflation, hence, option c is incorrect