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 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.
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.

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.

Answer 1

The correct statement that describes 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's monetary policy can impact inflation. By reducing the money supply, borrowing becomes more expensive, leading to decreased spending and investment, which ultimately helps to lower inflation.