Question

Which statements describe how the Fed responds to high inflation? Check all that apply.

It charges banks more interest.
It pays banks less interest.
It sells more securities.
It decreases the money supply.
It increases the money supply.

Answer 1

Correct answers:
- It charges banks more interest.
- It sells more securities.
- It decreases the money supply.

Brief explanation: To fight high inflation the Fed tightens monetary policy — it raises short-term interest rates (so banks pay more to borrow), conducts open-market sales of Treasury securities (which drains bank reserves), and thereby reduces the money supply. "It pays banks less interest" and "It increases the money supply" are not actions consistent with fighting high inflation.