During a period of inflation, the Fed is likely to:
A) sell government securities to banks in order to reduce the amount of loanable funds.
B) buy government securities from banks in order to reduce the amount of loanable funds.
C) cut the discount rate to increase the affordability of loanable funds.
D) cut the required reserve ratio in order to reduce the amount of excess reserves banks have to loan out.

Question

Quizplus · Accepted Answer

During a period of inflation, the Federal Reserve (Fed) is likely to sell government securities to banks. This action reduces the banks' reserves, thereby decreasing the amount of money they can lend out. This process is part of a contractionary monetary policy aimed at reducing inflation by decreasing the money supply and increasing interest rates.

During a Period of Inflation, the Fed Is Likely To