Why would the Federal Reserve Board choose to tighten the money supply?

Why would the Federal Reserve Board choose to tighten the money supply?

• A. To mitigate economic downturns
• B. To increase employment rates
• C. To combat excessive inflation
• D. To promote international trade

Answer: (C)

The Federal Reserve Board may choose to tighten the money supply primarily to combat excessive inflation. When inflation rises beyond a manageable level, it erodes purchasing power and can lead to economic instability. By tightening the money supply, which typically involves increasing interest rates or reducing bond purchases, the Fed can decrease the amount of money circulating in the economy. This reduction often leads to higher borrowing costs, which can slow down consumer spending and business investments. Over time, this can help to stabilize prices as demand decreases, reigning in inflationary pressures. The goal is to maintain price stability, which is crucial for sustainable economic growth and overall financial health in the economy. Therefore, combating excessive inflation is a key reason the Federal Reserve would implement such a policy.

The Federal Reserve Board may choose to tighten the money supply primarily to combat excessive inflation. When inflation rises beyond a manageable level, it erodes purchasing power and can lead to economic instability. By tightening the money supply, which typically involves increasing interest rates or reducing bond purchases, the Fed can decrease the amount of money circulating in the economy.

This reduction often leads to higher borrowing costs, which can slow down consumer spending and business investments. Over time, this can help to stabilize prices as demand decreases, reigning in inflationary pressures. The goal is to maintain price stability, which is crucial for sustainable economic growth and overall financial health in the economy. Therefore, combating excessive inflation is a key reason the Federal Reserve would implement such a policy.