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. — The Fed raises rates (e.g., the discount rate) to tighten credit.
- It sells more securities. — Open-market sales drain bank reserves and push up interest rates.
- It decreases the money supply. — Tightening actions (rate hikes, security sales) reduce available money.

The other two are incorrect: paying banks less interest or increasing the money supply would be expansionary, not a response to high inflation.