Final answer:
The Fed raises interest rates when it's concerned about inflation. This is part of a contractionary monetary policy to control the money supply and stabilize the economy. Historical examples demonstrate the Fed's responsiveness to inflation risks and its use of interest rates as a tool for managing economic growth.
Step-by-step explanation:
The Federal Reserve (the Fed) raises interest rates when it's worried about inflation, which is a steady rise in consumer prices. When the Fed perceives that inflation is on an upswing or if there are indicators that it might rise above their targeted threshold, they often implement a contractionary monetary policy to cool down the economy. This approach involves raising the federal funds rate, which in turn increases borrowing costs, discouraging banks, businesses, and consumers from borrowing and spending excessively. High interest rates can reduce the amount of money in the money supply, thus controlling inflation, but they may also slow down the economy and potentially lead to a recession if businesses invest less and consumers reduce their spending.
Examples from the Fed's History:
In the 1990s, the Fed raised the federal funds rate to combat potential inflation, which contributed to continued economic growth without increasing inflation rates. Later, in the late 1990s and early 2000s, even the potential of inflation exceeding 3% prompted the Fed to adopt a contractionary stance. Ben Bernanke, a Federal Reserve Board member during the early 2000s, advocated for an inflation targeting system, where an inflation rate of 2% or less would signify a stable economy and trigger stimulative measures should inflation be expected to remain below that threshold.
Therefore, the correct answer to the question is d) Inflation.