If the economy's resources are fully employed and prices are starting to rise, the Fed can ________ the money supply in an attempt to reduce inflationary pressure. If this action is well-calculated, output will ________.

Question

Quizplus · Accepted Answer

Decreasing the money supply is a monetary policy tool used by the Federal Reserve (Fed) to combat inflation. By reducing the money supply, the Fed can increase interest rates, which typically reduces spending and investment, helping to cool off inflationary pressures. When done correctly, this action aims to stabilize the economy without significantly deviating from its potential output level, hence the output remains close to its potential level.

If the Economy's Resources Are Fully Employed and Prices Are