ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The Federal Reserve increases the discount rate, which causes interest rates to rise and people to save rather than to spend. How might monetary policy be used to combat inflation fears? The Federal Reserve might lower taxes.

Detailed explanation-2: -The Federal Reserve seeks to control inflation by influencing interest rates. When inflation is too high, the Federal Reserve typically raises interest rates to slow the economy and bring inflation down.

Detailed explanation-3: -If the Fed buys bonds in the open market, it increases the money supply in the economy by swapping out bonds in exchange for cash to the general public. Conversely, if the Fed sells bonds, it decreases the money supply by removing cash from the economy in exchange for bonds.

Detailed explanation-4: -And why does it matter going forward? Consider, first, why the Fed buys bonds to boost growth and inflation. Bond-buying, or “quantitative easing” (QE), works via the so-called credit channel. That is, it encourages banks to lend more.

Detailed explanation-5: -Answer and Explanation: The correct answer is option d) Sell securities in the open market. The Fed can try to curb inflation by reducing the money supply in the economy. It can be done by selling government securities in the open market in exchange for money.