Which action would the Federal Reserve take to limit inflation?

Which action would the Federal Reserve take to limit inflation?

• A. Increasing government spending
• B. Printing more money
• C. Adjusting interest rates to limit inflation
• D. Setting tax rates

Answer: (C)

The concept being tested is how the Federal Reserve uses monetary policy to control inflation. When inflation is high, the Fed can raise the federal funds rate, making borrowing more expensive for households and businesses. Higher interest rates slow consumer spending and business investment, which reduces overall demand in the economy. With demand growth cooled, price increases ease, helping to limit inflation. The other options involve fiscal policy or increasing the money supply, which the Fed does not control. Increasing government spending or setting tax rates are fiscal tools used by lawmakers, not the central bank. Printing more money would boost the money supply and typically fuel higher inflation rather than curb it.

The concept being tested is how the Federal Reserve uses monetary policy to control inflation. When inflation is high, the Fed can raise the federal funds rate, making borrowing more expensive for households and businesses. Higher interest rates slow consumer spending and business investment, which reduces overall demand in the economy. With demand growth cooled, price increases ease, helping to limit inflation.

The other options involve fiscal policy or increasing the money supply, which the Fed does not control. Increasing government spending or setting tax rates are fiscal tools used by lawmakers, not the central bank. Printing more money would boost the money supply and typically fuel higher inflation rather than curb it.