Final answer:
In response to high inflation, the Federal Reserve would likely use contractionary monetary policy to reduce the money supply and raise interest rates, which should help to lower inflation by decreasing economic activity.
Step-by-step explanation:
If the inflation rate increases, the Federal Reserve would likely respond with contractionary monetary policy. This type of policy is used to reduce the amount of money and credit available in the economy. By doing so, the Federal Reserve aims to raise interest rates, which discourages borrowing for investment and consumption. Consequently, this leads to a leftward shift in aggregate demand, potentially lowering the inflation rate by reducing the level of economic activity.
It's important to note that expansionary monetary policy, on the other hand, is used to combat recessionary pressures by increasing the money supply and lowering interest rates to encourage economic activity. However, in the case of high inflation, expansionary monetary policy would not be suitable as it could exacerbate the inflation problem.
Lastly, fiscal policy and supply-side policy are different macroeconomic tools that the government can use to influence the economy. Fiscal policy refers to changes in government spending and taxation, while supply-side policy involves measures aimed at increasing production efficiency and encouraging investment into the economy.