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 and causing both costs and prices to fall.
D) Increase taxes, reducing costs and causing prices to fall.

Question

Quizplus · Accepted Answer

Selling government bonds reduces the money supply as people use money from their accounts to purchase the bonds. This reduces aggregate demand and interest rates rise, which slows down inflation. Buying government bonds would increase the money supply, which would lead to increased demand and higher inflation. Decreasing the discount rate or increasing taxes would also have limited impact on reducing the supply of money.

Which of the Following Actions Should the Central Bank Take