Which action would be taken by the Federal Reserve?

• A. Adjusting interest rates to prevent inflation.
• B. Setting tax policy.
• C. Issuing currency.
• D. Regulating foreign trade.

Answer: (A)

The action being tested is how the Federal Reserve uses monetary policy to influence inflation. The Fed can raise or lower the federal funds rate, which affects borrowing costs throughout the economy. When inflation is rising, increasing rates makes loans more expensive, slows spending by consumers and businesses, and helps cool price increases. This direct control of money supply and interest rates is the Fed’s main tool for keeping inflation in check.

Other government actions described don’t fall under the Fed’s usual responsibilities: setting tax policy is fiscal policy handled by Congress and the President; issuing currency is associated with treasury functions and central banking in a broader sense but isn’t the typical policy move used to control inflation; regulating foreign trade involves trade policy managed by different agencies.