Which of the following statements correctly describes how the Federal Reserve can reduce inflation?(1 point)

Question

Responses

The Federal Reserve can reduce the money supply, which increases the cost of capital and cost of borrowing, which increases demand for goods and services, leading to reduced inflation rates.
The Federal Reserve can reduce the money supply, which increases the cost of capital and cost of borrowing, which increases demand for goods and services, leading to reduced inflation rates.

The Federal Reserve can increase the money supply, which increases the cost of capital and cost of borrowing, which reduces demand for goods and services, leading to reduced inflation rates.
The Federal Reserve can increase the money supply, which increases the cost of capital and cost of borrowing, which reduces demand for goods and services, leading to reduced inflation rates.

The Federal Reserve can reduce the money supply, which increases the cost of capital and cost of borrowing, which reduces demand for goods and services, leading to reduced inflation rates.
The Federal Reserve can reduce the money supply, which increases the cost of capital and cost of borrowing, which reduces demand for goods and services, leading to reduced inflation rates.

The Federal Reserve can reduce the money supply, which reduces the cost of capital and cost of borrowing, which reduces demand for goods and services, leading to reduced inflation rates.

Answer 1

The correct statement describing how the Federal Reserve can reduce inflation is:

The Federal Reserve can reduce the money supply, which increases the cost of capital and cost of borrowing, which reduces demand for goods and services, leading to reduced inflation rates.

This statement accurately reflects the mechanism by which the Federal Reserve controls inflation. By reducing the money supply, interest rates tend to increase, making borrowing more expensive. This usually leads to a decrease in consumer spending and business investment, ultimately reducing demand and helping to bring down inflation.