A central bank operating under a symmetric inflation target of 2.0% observes that domestic CPI inflation has risen to 5.8% due to an overheating economy and rapid credit expansion. To restore price stability, which combination of policy actions and monetary outcomes should the central bank pursue?
Increase the Bank Rate, purchase financial assets (Quantitative Easing), leading to an expansion of the money supply.
Decrease the Bank Rate, sell financial assets (Quantitative Tightening), leading to a contraction of the money supply.
Increase the Bank Rate, sell financial assets (Quantitative Tightening), leading to a contraction of the money supply.
Decrease the Bank Rate, purchase financial assets (Quantitative Easing), leading to an expansion of the money supply.
