Suppose that you are a member of the Board of Governors, of the Federal Reserve System. The economy is experiencing a sharp and prolonged inflationary trend. What changes, in (a) the reserve ratio, (b) the discount rate, and (c) open-market operations, would you recommend? Explain, in each case, how the change you advocate would affect commercial bank reserves, the money supply, interest rates, and aggregate demand.

a) Reserve Ratio: - An increase in reserve ratio results in more reserve kept by the commercial bank in terms of reserve and it lends out less money in the terms of the loan to the general public that decreases the money supply in an economy and it increases the rate of interest which causes the aggregate demand curve shifts leftward. In this way, inflation reduces in an economy.

b) Discount rate:- An increase in discount rate results in less of reserve kept by a commercial bank and it reduces the money supply in an economy. It increases the rate of interest which reduces investment and it causes the aggregate demand curve shifts leftward. In this way, inflation reduces in an economy.

c) Open market sale:- In the open market sale, the less reserve is kept by the commercial bank and it lends out less money in the hands of the public in terms of the loan. It decreases the money supply in an economy which increases the rate of interest and it causes the aggregate demand curve shifts leftward. In this way, inflation is reduced in an economy.