Question:
To combat high inflation, a central bank would typically:
(1) Buy government securities in the open market.
(2) Lower the reserve requirement ratio.
(3) Increase the policy interest rates.
(4) Print more currency.
(5) Encourage banks to lend more.
Correct Answer:
(3)
Answer Explanation:
High inflation requires contractionary monetary policy. Raising interest rates makes borrowing expensive and saving attractive, which reduces consumption and investment (Aggregate Demand), cooling down price pressures.
Topic: Monetary Policy Year: 2024
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