Which of the following actions should the central bank take if monetary authorities want to reduce the supply of money to slow the rate of inflation?
A) Sell government bonds, reducing money supply, increasing interest rates and slowing aggregate demand.
B) Buy government bonds, reducing money supply, increasing interest rates and slowing aggregate demand.
C) Decrease the discount rate, lowering interest rates, causing both costs and prices to fall.
D) Increase taxes, reducing costs, causing prices to fall.

Question

Quizplus · Accepted Answer

Selling government bonds reduces the money supply and increases interest rates, which in turn slows aggregate demand and helps to slow the rate of inflation. Buying government bonds would increase the money supply and worsen inflation. Decreasing the discount rate would lower interest rates and encourage borrowing and spending, which would worsen inflation. Increasing taxes would also not directly reduce the money supply or interest rates, and may have a negative effect on economic growth.

Which of the Following Actions Should the Central Bank Take