Question

Assuming that the Fed judges inflation to be the most significant problem in the economy and that it wishes to employ all of its policy instruments except interest on reserves, what should the Fed do with its policy tools?

Short answer

The Fed should open market operations, change reserve ratios, discount rate changes etc.

Step-by-step solution

introduction

Fed can utilize the arrangement instruments of the open market tasks, changes in the hold proportion and the given markdown rate change.

explanation

By expanding the loan fees, the banks need to keep more cash with the government bank to bring in higher cash. The government would raise markdown rates ultimately prompting a low cash supply in the economy.

Open market activities incorporate the buy and the offer of U.S. government protections in an open market and with the given high inflation in an economy, Fed would decide to sell its securities which would help in decreasing the cash supply.