? asked in Social ScienceEconomics · 1 decade ago

Which of the following Fed policies would help reduce inflation?

Which of the following Fed policies would help reduce inflation?

A. Open market purchases of government securities.

B. Reducing federal spending on defense.

C. Raising the reserve requirement.

D. Reducing the discount rate.

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  • 1 decade ago
    Favorite Answer

    A is wrong; OMO buying of securities increases the money in peoples pockets, encourages them to buy more, increasing inflation.

    B is wrong. Reducing spending reduces the amount of money available in the economy, decreases demand and reduces inflation. BUT the Fed does not control defence spending.

    C is correct, increasing the reserve requirement forces commercial banks to loan out less out of every dollar deposited with them; less loans means less consumption and investment, less demand, lowering inflation.

    D is wrong; reducing the discount rate allows banks to reduce interest rates, more consumption and investment, increasing demand and increasing inflation.

    Answer is C.

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