General Education Development (GED) Practice Exam

If the U.S. Federal Reserve concludes that there is a significant risk of inflation, what is it most likely to do?

1. Raise interest rates

2. Lower interest rates

3. Keep interest rates the same

4. Decrease bond yields

The correct answer is: Raise interest rates

When the U.S. Federal Reserve identifies a significant risk of inflation, its typical response is to raise interest rates. This action is intended to reduce the money supply in the economy and curb spending. Higher interest rates make borrowing more expensive, which in turn discourages consumer spending and business investments. As demand decreases, it helps to cool down the economy and keep inflation in check. By raising interest rates, the Federal Reserve aims to stabilize prices, allowing the economy to grow at a sustainable pace without triggering inflation. This monetary policy tool is fundamental to managing economic health, as inflation can erode purchasing power and create uncertainty in financial markets. Adjusting interest rates is one of the most direct ways the Fed can influence economic activity and maintain price stability.