Based on the situation depicted in the graph below, which of the following would be an appropriate monetary policy response?

Question

Based on the situation depicted in the graph below, which of the following would be an appropriate monetary policy response?​

Quizplus · Accepted Answer

The graph shows a decrease in the federal funds rate, meaning that banks are able to borrow money from each other at lower rates. This can lead to an increase in borrowing and spending in the economy, which can potentially result in inflation. To combat this, the Fed can increase the interest rate it pays on bank reserves, which would encourage banks to keep more money with the Fed and less in circulation, helping to slow down spending and inflation. Decreasing reserve requirements (choice A) or buying government bonds (choice C) could also potentially help, but they would not directly address the issue of low interest rates leading to increased borrowing and potential inflation. Therefore, the best choice is B.

Based on the Situation Depicted in the Graph Below, Which