Correct Response: B. Inflation is a period of rising prices. Inflation is caused by too much money circulating in the economy. Governments often use monetary policy to control inflation when its rate becomes too high. One way to do this is to for the Federal Reserve to increase sales in U.S. government treasury securities. Increasing sales of treasury securities effectively removes money from the marketplace, exchanging cash for bonds. Reserve requirements are the amounts of funds that banks must hold in reserve against deposits. Decreasing the reserve requirements allows banks to lend more, which would increase the money supply and increase inflation (A). Decreasing the discount rates makes it cheaper for commercial banks to borrow money, which results in an increase in lending activity and an increase in inflation (C). Increasing the amount of money printed puts more money in the hands of consumers and increases spending; this results in prices rising, and inflation is expected (D).
