Which of these situations is most likely to cause the Fed to introduce a tight money supply?

Question

A.
The federal government passes a new budget with a large deficit.

B.
The economy is prosperous with relatively low inflation and low unemployment.

C.
A recession has reduced aggregate demand and increased unemployment.

D.
The economy is expanding quickly and inflation is a concern.

Answer 1

The situation most likely to cause the Fed to introduce a tight money supply is:

D. The economy is expanding quickly and inflation is a concern.

In this scenario, the Fed would typically raise interest rates or take other measures to tighten the money supply in order to prevent the economy from overheating and to control inflation.