Assuming that the Fed judges inflation to be the most significant problem in the economy and that it wishes to employ all of its policy instruments except interest on reserves, explain how the Fed should implement its three policy tools to contain inflation.
In your essay, focus on the following questions:
What are the different policy tools the Fed uses to address significant economic problems?
What problems can inflation cause in an economy?
Which policy tool or combination of policy tools would work best to contain inflation?
Does the policy tool or combination of policy tools differ in case of low inflation?