Question

Which action by the Federal Reserve would help to slow down rising inflation?

Answer 1

Inflation happens when an economy's currency becomes worthless than it was before and its exchange rate weakens when compared to other currencies.

The most common way of slowing down inflation is contractionary monetary policy.


This policy ensures a reduction of money supply within an economy by decreasing bind prices and increasing interest rates.

Thus reduces spending.

The federal reserve is also known as the central bank.

At this level interest rates are increased through the central bank.

The banks borrow from the government at a federal funds rate during inflation.

And in order to make money the banks also lend money at a high rate.

When this happens the supply of money is reduced and thus spending.

When less money is spent, the prices of goods also go down and thus inflation is slowed down and reduced.

Answer 2

Tight monetary policy and raising the interest rates is the action taken by the Federal Reserve to slow down the rising inflation.

Explanation:

• When the economy is rising very fast then the Federal Reserve can use its power of a tight monetary policy.  

• With this policy, they can raise the interest rates which lead to the ‘lower money supply’ in the economy.  

• The higher rate of interest will discourage borrowing. This will, in turn, lower the money supply in the economy.  

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