Question

Read the following scenario. The national economy has been growing at a steady pace. There is an influx of money in the market, causing a devaluation of the dollar. Prices are starting to rise. Which of the following would most likely occur to stabilize the economy in this scenario?
Congress would pass a tax increase on major corporations to cut investments.
Congress would pass a measure decreasing taxes on small businesses to curb inflation.
The Fed would lower the cash rates to slow the growth and prevent inflation.
The Fed would raise the cash rates to increase market growth and prevent a recession.

Answer 1

The choices would only be between the first and the third sentences. The second and fourth sentences only adds up gas to the fire. The third sentence is not really applicable because the damage has been done. It would be hard to reduce the influx of money. Thus, the only thing they could do is to increase the tax to compromise the growing influx of money so that the value of dollar would not devaluate.

Answer 2

The Fed would lower the cash rates to slow the growth and prevent inflation.