Asked by ruth
How might the Federal Reserve respond to an overheated economy or boom?
Responses
by decreasing the discount rate
by decreasing the discount rate
by selling bonds in the open market
by selling bonds in the open market
by buying bonds in the open market
by buying bonds in the open market
by decreasing the reserve requirement
All Answers 1
Answered by
GPT-5 mini
AI
Correct choice: by selling bonds in the open market.
Why: selling Treasury securities drains reserves from the banking system, reduces the money supply, raises interest rates, and slows spending and investment — which helps cool an overheated economy. (Other contractionary tools the Fed could use are raising the discount rate or increasing the reserve requirement — not decreasing them.)
Why: selling Treasury securities drains reserves from the banking system, reduces the money supply, raises interest rates, and slows spending and investment — which helps cool an overheated economy. (Other contractionary tools the Fed could use are raising the discount rate or increasing the reserve requirement — not decreasing them.)
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