If the Fed judges inflation to be the most significant problem, which actions will it likely take?

When the Federal Reserve (Fed) identifies inflation as a significant problem, it typically takes measures to reduce the money supply in the economy, because too much money circulating can lead to rising prices. The correct answer describes a series of actions that accomplish this goal effectively.

Open market sales involve the Fed selling government securities to financial institutions, which effectively removes money from the banking system. When banks buy these securities, they pay with their reserves, thereby decreasing the amount of money they have available to lend, which can lead to higher interest rates.

Increasing the reserve requirement mandates that banks hold a larger fraction of their deposits as reserves. This action further restricts the amount of money that banks can lend out, again leading to a tightening of the money supply.

Increasing the discount rate, which is the interest rate at which banks borrow from the Fed, makes borrowing more expensive for banks. This discourages them from taking loans from the Fed and decreases their reserves, thus reducing the capacity for banks to create new loans and money.

Together, these three actions work to decrease the money supply, which can help to combat inflationary pressures by making borrowing more expensive and reducing excess liquidity in the market. This approach reflects the Fed's objective of stabilizing prices when inflation is regarded