The Federal Reserve is likely to pursue increased interest rates to combat high inflation. Here's why:
1. **Increased interest rates**: When the Federal Reserve raises interest rates, borrowing money becomes more expensive. As a result, businesses and individuals are less likely to take out loans to spend on goods and services. This decrease in spending helps to slow down economic activity, which can reduce inflationary pressures.
2. **Effect on inflation**: High inflation is often caused by excess demand in the economy, leading to prices rising rapidly. By increasing interest rates, the Federal Reserve aims to cool down this demand and prevent prices from increasing at unsustainable rates.
3. **Alternative options**: While decreased reserve requirements and an expanded money supply can also impact the economy, they are less likely to be used specifically to fight high inflation. Decreased reserve requirements can encourage banks to lend more money, potentially stimulating economic growth but also increasing inflationary pressures. An expanded money supply could also fuel inflation if the economy is already overheating.
In summary, out of the options provided, increased interest rates are the most likely policy the Federal Reserve would pursue to combat high inflation due to its impact on borrowing, spending, and overall economic activity.
