Which statements describe how the fed responds to high inflation? Check all that apply.
A) It charges banks more interest.
B) It pays banks less interest.
C) It sells more securities.
D) It decreases the money supply.
E) In increases the money supply.
Answer: The correct options are A, C and D.
When the inflation rate is high, the Federal Reserve (Fed), and the Central Bank of the United States put measures in place to decrease the money supply within the economy and consequently increase the monetary policy stringency. By correctly adjusting the interest rate for the reserves held at the Fed higher (option A), the Fed deters the creation of credit money by banks. Another action the Fed undertakes to directly impact the money supply is the disposing of government securities in its portfolio- Disinvestment in government securities (Option C). Both these actions along with the direct altering of the money supply (option D) thus have the potential to slow down economic growth and rein in inflation. Options B and E are to increase the money supply, and as it has been mentioned above, such a policy is not appropriate when the level of inflation is high.