To cool off an inflationary economy,a government might ________.

Question

Quizplus · Accepted Answer

To cool off an inflationary economy, the government might raise interest rates. By increasing interest rates, borrowing becomes more expensive, which reduces the money supply and therefore reduces aggregate demand. This can help to combat inflationary pressures in the economy. Lowering interest rates, as in choice A, would have the opposite effect and could actually exacerbate inflation. Lowering or raising foreign exchange rates, as in choices C and D, respectively, would not necessarily address inflation directly and could have unintended consequences on the economy.

To Cool Off an Inflationary Economy,a Government Might ________