If the economy is inflationary, the Fed would most likely:
A) increase bank reserves by raising the discount rate.
B) increase bank reserves by buying government securities
C) decrease bank reserves by lowering the discount rate.
D) decrease bank reserves by selling government securities.

Question

Quizplus · Accepted Answer

If the economy is inflationary, the Fed would most likely decrease bank reserves by selling government securities. This would increase interest rates and reduce the amount of money circulating in the economy, thus reducing inflationary pressures. Option A would increase bank reserves, which would stimulate lending and further fuel inflation. Option B would also increase bank reserves, which would increase the money supply and potentially worsen inflation. Option C would stimulate lending and increase the money supply, also exacerbating inflation. Thus, option D is the most appropriate choice.

If the Economy Is Inflationary, the Fed Would Most Likely