When the economy is at full employment and inflation is present, the government could create a surplus budget by cutting its own spending and raising taxes. The Fed would be expected to:
A) reduce the required reserve ratio, increase the discount rate, and buy securities on the open market.
B) reduce the required reserve ratio, reduce the discount rate, and sell securities on the open market.
C) reduce the required reserve ratio, reduce the discount rate, and buy securities on the open market.
D) increase the required reserve ratio, reduce the discount rate, and sell securities on the open market.
E) increase the required reserve ratio, increase the discount rate, and sell securities on the open market.

Question

Quizplus · Accepted Answer

When the economy is at full employment with inflation, the Fed would likely pursue contractionary monetary policy to reduce inflation. This involves increasing the required reserve ratio, increasing the discount rate, and selling securities on the open market to decrease the money supply.

When the Economy Is at Full Employment and Inflation Is