Question

Which of the following actions should the central bank take if monetary authorities want to reduce the supply of money to slow the rate of inflation?

a) Decrease the interest rates
b) Increase government spending
c) Conduct open market purchases
d) Decrease the reserve requirements

Answer 1

The central bank should conduct open market purchases to reduce the supply of money and slow down inflation.

Step-by-step explanation:

The correct action the central bank should take to reduce the supply of money and slow down the rate of inflation is option c) Conduct open market purchases. With open market purchases, the central bank buys government bonds from banks, reducing the money supply in circulation. This decreases the amount of money available for borrowing and spending, helping to slow down inflation.

Decreasing the interest rates (option a) and increasing government spending (option b) would actually stimulate the economy and increase the money supply, leading to higher inflation rates. Decreasing the reserve requirements (option d) would also increase the money supply by allowing banks to lend out more money.