If the Federal Reserve authorities were attempting to reduce demand-pull inﬂation, the proper policies would be to
A) sell government securities, raise reserve requirements, raise the discount rate, and increase the interest paid on reserves held at the Fed banks.
B) buy government securities, raise reserve requirements, raise the discount rate, and reduce the amount of interest paid on reserves held at the Fed banks.
C) sell government securities, lower reserve requirements, lower the discount rate, and increase the interest paid on reserves held at the Fed banks.
D) sell government securities, raise reserve requirements, lower the discount rate, and increase the interest paid on reserves held at the Fed banks.

Question

Quizplus · Accepted Answer

In order to reduce demand-pull inflation, the Federal Reserve needs to reduce the overall demand in the economy. This can be done by decreasing the money supply. Selling government securities will decrease the money supply by removing money from the economy. Raising reserve requirements means that banks have to keep more money in reserve, which decreases the amount of money available for lending and spending. Raising the discount rate increases the cost of borrowing, which also decreases demand. Lastly, increasing the interest paid on reserves held at the Fed banks makes it more attractive for banks to keep money in reserves rather than lend it out, which again decreases overall demand in the economy.

If the Federal Reserve Authorities Were Attempting to Reduce Demand-Pull