Assume the Fed's target for unemployment is 4% to 5%, and its target for inflation is 2% to 3%. If the unemployment rate is 4.5% and the inflation rate is 6%, the Federal Reserve will most likely
A) lower the discount rate.
B) buy bonds.
C) lower the reserve requirement.
D) sell bonds.

Question

Quizplus · Accepted Answer

In this scenario, the inflation rate is above the Fed's target range, indicating that the economy may be overheating. To combat inflation, the Fed would typically sell bonds. This reduces the money supply in the economy and increases interest rates, which can help to slow down spending and reduce inflationary pressures. Lowering the discount rate, buying bonds, or lowering reserve requirements would all increase the money supply, which would exacerbate inflationary pressures.

Assume the Fed's Target for Unemployment Is 4% to 5