If an economy's inflation rate is above target, the central bank would be most likely to
A) encourage banks to provide loans by lowering the refinancing rate.
B) encourage banks to provide loans by raising the refinancing rate.
C) restrict bank lending by lowering the refinancing rate.
D) restrict bank lending by raising the refinancing rate.

Question

Quizplus · Accepted Answer

When an economy's inflation rate is above target, the central bank would want to reduce the money supply and dampen demand to control inflation. One of the ways to achieve this is to raise the refinancing rate, which makes borrowing more expensive and reduces the amount of money in circulation. Additionally, this would also discourage banks from lending, further reducing demand and inflationary pressures. Thus, the best choice would be to restrict bank lending by raising the refinancing rate.

If an Economy's Inflation Rate Is Above Target, the Central