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.
E) decrease bank reserves by lowering the legal reserve requirement.

Question

Quizplus · Accepted Answer

If the economy is inflationary, the Fed would want to decrease bank reserves in order to increase interest rates and slow down spending. Selling government securities reduces the amount of reserves in the banking system, leading to a decrease in the money supply and an increase in interest rates.

If the Economy Is Inflationary, the Fed Would Most Likely