Final answer:
To address strong economic growth and rising inflation, the central bank can use open market operations to reduce reserves or raise key interest rates like the interest on reserve balances rate and the discount rate, both actions intended to reduce money supply and raise market interest rates. The correct option is a.
Step-by-step explanation:
The appropriate policy implementation when economic growth is very strong, and the inflation rate rises above the Fed's price stability goal would be to use open market operations to decrease the level of reserves in the banking system.
This action effectively raises interest rates, as it reduces the supply of loanable funds in the economy, leading to an increase in market interest rates. Specifically, the central bank can sell securities, which reduces banks' reserves, increasing the federal funds rate.
Alternatively, the central bank can also opt to raise the interest on reserve balances rate, ON RRP offering rate, and discount rate, making it more expensive for banks to borrow from the Fed and incentivizing them to hold more reserves instead of lending them out.
This also helps to control inflation by making borrowing more expensive and reducing consumer and business spending. The correct option is a.