//newconnect Help Save & Exit One goal of the Federal Reserve is controlling inf
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//newconnect Help Save & Exit One goal of the Federal Reserve is controlling inflation. Which of the following policy actions are likely to heip the Fed meet that go Instruction:You may select more than one answer You must click to select or deselect each option in order to receive full credt Click the box with a check mark for the conect answers and click twice to empty the box for the wrong answe Cuting the fed funds rete to zero setting en·ntation target of 2 percent Reising the incerest rese on reserves Making Ierge Ioan to . big financial nsttution that Reising the iscount reste obout to fail DOLL F7 F8 F10 F11 F3 F5 F6 7 8 0 5 2 WEExplanation / Answer
Federal Reserve can control inflation by following contractionary monetary policy . A contractionary monetary policy is pursued to control inflation and bring it to a targeted level . It is a means to control the money supply in the economy. Inflation can be fought by decreasing the money supply thereby increasing the cost of borrowing ( interest rates ) which ultimately decreases growth of GDP and brings down the inflation . There are 3 tools FED can use .
a) Discount rate : Rising the discount rate . Discount rate is the rate FED charges commercial banks for short term loans . Raising it would make loans costlier and less desirable , so money supply falls .
b) Reserve requirement : Raising the interest rate on reserves . Reserves are the amount the commercial banks must hold in cash . So raising interest rate on them would make them lucrative . So commercial banks reserve more and make less cash available for lending .
c) Open market operation : Cutting the FED funds rate to zero . Open market operations refers to buying and selling of bonds . FED funds rate is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight . So cuts in that rate would cause no longer such lending . Hence money supply falls .
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