Question

If the Federal Reserve authorities were attempting to reduce demand-pull inflation, what would be the proper policies?

A. Sell government securities, raise reserve requirements, raise the discount rate, and increase the interest paid on reserves held at the Fed banks.
B. Sell government securities, raise reserve requirements, lower the discount rate, and increase the interest paid on reserves held at the Fed banks.
C. Buy government securities, raise reserve requirements, raise the discount rate, and reduce the amount of interest paid on reserves held at the Fed banks.
D. Sell government securities, lower reserve requirements, lower the discount rate, and increase the interest paid on reserves held at the Fed banks.

Answer 1

To reduce demand-pull inflation, the Federal Reserve should sell government securities, raise reserve requirements, raise the discount rate, and increase the interest paid on reserves held at the Fed banks.

Step-by-step explanation:

To reduce demand-pull inflation, the Federal Reserve authorities would need to implement the following policies:

1. Sell government securities: Selling government securities in the open market reduces the money supply and helps to decrease inflationary pressures.
2. Raise reserve requirements: Increasing the reserve requirements for banks means that they must hold a higher percentage of their deposits as reserves, reducing the amount of money available for lending and spending.
3. Raise the discount rate: Increasing the discount rate encourages banks to borrow less from the Federal Reserve, which leads to a decrease in the money supply.
4. Increase the interest paid on reserves held at the Fed banks: By increasing the interest paid on reserves, the Federal Reserve can incentivize banks to hold more reserves rather than lending them out, thus reducing the money supply.