Question

    Suppose a country experiences a high rate of inflation

    due to excessive government spending and monetary expansion. The central bank wants to control inflation. Which of the following actions would be most effective in reducing inflation?  
    A Reducing the interest rate to stimulate economic growth Correct Answer Incorrect Answer
    B Increasing the money supply to accommodate inflationary expectations Correct Answer Incorrect Answer
    C Selling government securities in the open market Correct Answer Incorrect Answer
    D Lowering reserve requirements to encourage bank lending Correct Answer Incorrect Answer
    E Encouraging commercial banks to reduce loan interest rates Correct Answer Incorrect Answer

    Solution

    • Inflation occurs when too much money is circulating in the economy . 
    • Selling government securities (open market operations) withdraws money from circulation , reducing inflationary pressure. 
    • Reducing interest rates (A) and increasing money supply (B) would further fuel inflation . 
    • Lowering reserve requirements (D) increases lending, also worsening inflation . 

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