Question

Which action can the Federal Reserve take to pursue a tight-money policy?

A.
raise tax rates on all taxpayers to increase revenues
B.
decrease the amount of money in the economy
C.
regulate trading between banks and customers
D.
prevent the government from running a deficit
E.
increase the amount of money in the economy

Answer 1

The Federal Reserve pursues a tight-money policy by b)decreasing the amount of money in the economy, often by raising interest rates and other measures meant to reduce the money supply.

Step-by-step explanation:

To pursue a tight-money policy, the action that the Federal Reserve can take is to decrease the amount of money in the economy. This is typically done through mechanisms such as raising interest rates, which makes borrowing more expensive, and thus, reduces the amount of money circulating in the economy. Other measures can include increasing the reserve requirements for banks or selling government securities, both of which also aim to reduce the money supply and slow down economic activity. Tight-money policy is used when the Fed wants to combat inflation and cool down an overheated economy.