If the Fed believes the economy is experiencing (or about to experience) high levels of inflation, give an example of a monetary policy action it might take.

• The Fed can decrease inflation or counter possible inflation by increasing reserve requirements for commercial banks
• Another method is by the Fed selling government securities to the banks on open market operations

Explanation:

When there is inflation or rising price levels, the Fed uses contractionary monetary policy tools to decrease money supply in the economy. Price levels rise because there is more money in the market and hence high demand.

By selling securities, the Fed is able to take back the excess reserves from commercial banks which reduces the available amount to offer as loans to the lenders, this will decrease money supply and eventually decrease aggregate demand and price level

Another option is for the Fed to increase reserve requirements for the banks. Reserves are what each bank is required to hold in their vault. If this amount is raised by the Fed, the banks will have less to lend out and eventually will decrease money supply in the economy as well as inflation level