If the U.S. Federal Reserve concludes there is a significant risk of inflation, it will most likely:

If the U.S. Federal Reserve concludes there is a significant risk of inflation, it will most likely:

• A. Lower the interest rates
• B. Raise the interest rates
• C. Buy government bonds
• D. Increase taxes

Answer: (B)

When inflation risk is rising, the central bank tightens monetary policy by raising interest rates. Higher rates make borrowing more expensive, which cools consumer spending and business investment, easing price pressures and helping to prevent inflation from accelerating. Options that lower rates or buy government bonds would stimulate the economy and likely worsen inflation, and increasing taxes is a fiscal policy tool, not a monetary one. So raising interest rates is the action intended to slow demand and keep inflation in check.

When inflation risk is rising, the central bank tightens monetary policy by raising interest rates. Higher rates make borrowing more expensive, which cools consumer spending and business investment, easing price pressures and helping to prevent inflation from accelerating. Options that lower rates or buy government bonds would stimulate the economy and likely worsen inflation, and increasing taxes is a fiscal policy tool, not a monetary one. So raising interest rates is the action intended to slow demand and keep inflation in check.