question archive Suppose that during a period of inflation, the Fed reduced its holding of U
Suppose that during a period of inflation, the Fed reduced its holding of U
Subject:EconomicsPrice:2.88 Bought3
Suppose that during a period of inflation, the Fed reduced its holding of U.S. securities (sells bonds) from $600 billion to $580 billion. This indicates that the Fed was
a. seeking to reduce the money supply to decrease inflation.
b. trying to force Congress to decrease taxes.
c. expanding the money supply and stimulating employment.
d. expanding the money supply, even though the existing inflation suggested a restrictive policy would be more appropriate.
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The answer is a).
When the Fed reduces its holding of U.S. securities, the Fed is selling the bonds in the open market and retract cash/notes in circulation in the financial system. Thus, the central bank is trying to reduce the amount of money in the financial system, aiming to reduce the inflation pressure.
