Question

How could the Federal Reserve Board reduce high inflation rates?

Group of answer choices

It could expand the money supply by purchasing securities.

It could reduce the money supply by raising the discount rate.

It could expand the money supply by printing more currency. C It could reduce the money supply by raising the discount rate.

It could reduce the money supply by cutting reserve requirements.

Answer 1

C .It could reduce the money supply by raising the discount rate.

Step-by-step explanation:

Should a commercial bank fail to meet its reserves requirements, it may borrow from other commercial banks or the Federal Reserve. If it borrows from the Federal Reserve, it will be charged an interest rate known as the discount rate.

An increase in the discount rate makes the cost of borrowing from the fed to meet the reserve requirements expensive. Due to high costs, banks cannot afford to borrow money to lend to customers. As a result, banks will have minimum money to loan out, as they have to observe the reserve rule. Reduced lending by banks means limited money supply in the economy. Low supply of money reduces the rate of inflation.