ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Therefore, the central bank is likely to implement a contractionary monetary policy. This is a common strategy to fight inflation. When the central bank implements a contractionary monetary policy, it increases the interest rate, it increases the reserve requirements, and it sells government securities.

Detailed explanation-2: -When inflation is too high, the Federal Reserve typically raises interest rates to slow the economy and bring inflation down. When inflation is too low, the Federal Reserve typically lowers interest rates to stimulate the economy and move inflation higher.

Detailed explanation-3: -Key Takeaways When the Federal Reserve buys bonds, bond prices go up, which in turn reduces interest rates. Open market purchases increase the money supply, which makes money less valuable and reduces the interest rate in the money market.

Detailed explanation-4: -The action taken by the Fed in order to fight inflation is the contractionary monetary policy. It includes reducing the money supply in the country thus slowing the economy down and diminishing inflation. One of the tools used to achieve this goal is the increase in interest rates.